Boosted by IT, let down by Old Economy... -- A predictable corporate show

Krishnan Thiagarajan

THE LACK of both capital investment and sustained domestic demand over the past couple of years are the key factors responsible for the sluggish growth of the economy and, by extension, of Corporate India.

Less than a year ago, the economy appeared to be on the road to recovery, with a stable rupee, inflation at historic lows and interest rates at their lowest in a decade. But the spurt in international oil prices led to a sharp depreciation of the rupee and a firming up of interest rates, stifling any hope of near-term sustainable economic recovery.

Barring a few industries, the second-quarter earnings scorecard largely mimics the first (April-June 2000). In a mixed trend, while such industry segments as automobiles, refineries and cement continued to perform dismally, the picture in such other sectors as steel, non-ferrous metals and petrochemicals is brighter.

However, in the Old Economy sectors, the absence of a revival in the engineering/capital goods segments continues to cause concern. As always, the silver lining for Corporate India is the stellar export performance of the software industry, with the earnings numbers zooming for most frontline and second-rung companies.

Corporate report card

Business Line examined 900 companies that announced their earnings performance for the July-September quarter to analyse the state of the economy and identify individual winners and losers.

Prima facie, in the July-September quarter of 2000-01, both the topline (sales or total income from operations) and the bottomline (post-tax earnings before extraordinary items) showed fairly healthy growth. While the topline grew 22.7 per cent against the corresponding previous period, the bottomline kept pace, rising 27.2 per cent.

But the aggregate picture changes dramatically when the information technology sector (including hardware, software and peripherals) is excluded from the earnings universe; the report card reveals that the bottomline growth failed to keep pace with the topline. While the topline grew 22.02 per cent, the bottomline expanded only 23.37 per cent, proving the contribution of a strong IT performance.

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Coming back to the earnings universe (including IT companies), the sharp growth in total expenditure relative to topline growth led to a dip in the operating profit margin (OPM). With the economy caught in a slowdown the past couple of years, the focus of most companies is on improving sourcing/supply-chain efficiencies and labour productivity.

Assuming that the scope for cost reduction was minimal, the unexpected rise in oil prices was bound to affect the total expenditure of most companies, particularly the commodity sectors. Affected by the oil price hike, the OPM of the universe of companies declined 0.27 percentage point in July-September over the corresponding previous period.

Similarly, the gross profit margin also declined, by 0.28 percentage points this quarter. However, interest cost as a percentage of revenues also declined, suggesting that companies tried to improve working capital management in terms of lower debtor turnover and inventory carrying cost.

Though the absolute depreciation charges rose this quarter, their decline as a percentage of revenues is still a cause for concern for it indicates a reduction in capital investments, much needed to kickstart the economy. If this trend persists, even sectors that are doing well now may slip into a slowdown.

Gainers and losers

The list of top performers in post-tax earnings in July-September contains several software companies, such as Mascon Global, Infosys Technologies, SSI, Aftek Infosys, Orient Information Technology, Wipro and Satyam Computers. Some of the telecom/convergence/e-commerce players, such as Himachal Futuristic, Global Tele-Systems and Hinduja Finance, also made it to the top of the charts.

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The Old Economy companies in the gainers list were few, including Tata Steel, Ballarpur Industries, Wartsila NSD and CG Igarshi Motors. The gainers in sales overlap the top performers in post-tax earnings, such as Mascon Global, Infosys Technologies, Himachal Futuristic, SSI and Hinduja Finance.

The biggest losers in post-tax earnings this quarter were Mahindra and Mahindra, Tata Engineering (formerly Telco), Bajaj Auto, Thermax, Philips India, Carrier Aircon and Bata. More than the gainers, the losers clearly reflect the competitive pressure and the contrasting performances among players in individual industries.

For instance, while Bajaj Auto recorded a 41 per cent decline in post-tax earnings without extraordinary items in July-September on account of a slowdown in two-wheeler production, Hero Honda, its peer in the segment, recorded a 35 per cent rise in the number of motorcycles sold and a post-tax earnings increase of 48 per cent. Similarly, Tata Engineering was mauled by the slowdown in commercial vehicles (CV), the higher emission compliance cost and its ambitious car project, while its competitor Ashok Leyland emerged relatively unscathed, with better offtake from the Defence sector.

In the consumer electronics and air-conditioning segments, Philips India and Carrier Aircon were hit by competitive pressures from overseas/domestic players, which is consistently eating into the these players' market share.