India Inc.: Out of sync

Krishnan Thiagarajan

THE FINANCE Minister, Mr. Yashwant Sinha, convened, some time ago, a high-level meeting of industry chieftains, heads of financial institutions and representatives of the apex chambers of commerce.

He was concerned with the slippage in the index of industrial production between April and August vis-a-vis the same period last year. Clearly, the deceleration in industrial performance was largely the outcome of the sharp hike in petroleum prices and its impact on the commodity and core sectors.

The state of the economy can only be as good as the performance of individual industry segments. Business Line examined the July-September earnings performance of companies in critical segments to draw broad pointers on the state of Corporate India.

The bright spots...

Software-media-telecom triad dominate: In the software sector, almost all the frontline companies -- Infosys Technologies, Satyam Computers, Hughes Software, HCL Technologies and Wipro -- either fulfilled or exceeded investor and analyst expectations in the quarter, with most companies making it to the top of the sales and post-tax earnings charts. The sharp decline in revenue and post-tax earnings growth rates in Mastek was a cruel reminder of the low tolerance among growth companies for revenue and earnings disappointment. The stock was marked down sharply following its poor performance.

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Almost all the second-rung stocks, such as DSQ Software, Digital Equipment, Orient Information, SSI and Ramco Systems, performed well. But PSI Data Systems, Infotech Enterprises and Cybertech Systems and Software had a disappointing quarter.

In telecom equipment, Himachal Futuristic Communication and Shyam Telecom surged to the top of the sales and post-tax earnings chart. Among media and convergence plays, the stocks at the forefront were Hinduja Finance and Shri Adhikari Brothers.

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FMCG braves the odds: Hindustan Lever, the market leader and a barometer of the FMCG (fast moving consumer goods) industry, turned in a disappointing performance in the quarter, with flat revenue growth and a 16 per cent rise in post-tax earnings. For once, the barometer for the industry segment did not set the benchmark.

Almost all FMCG majors, such as SmithKline Beecham Consumer Healthcare, Britannia Industries, Dabur, and Reckitt and Colman, with the exception of Hindustan Lever and Colgate, did well, with superior topline growth.

The common thread through their performances was the strong urban tilt to their products. Though the excise duty was raised in the 2000-01 Budget, by maintaining the price line and small unit product launches, most of these players kept volumes more or less intact. By keeping a tight rein on expenditure through supply-chain efficiencies and direct distribution, most of the companies maintained their operating profit margins at the previous year's level, contributing to a fair increase in post-tax earnings.

Healthy pharma dose: Pharma companies, led by Dr Reddy's Laboratories, Sun Pharmaceuticals, Cipla, Lupin Laboratories and Ranbaxy Labs, did well in revenues and post-tax earnings. Among these, though Ranbaxy's post-tax earnings declined 32 per cent, its performance was largely driven by domestic revenues.

In relative terms, the pharma MNCs, of which around 12 have announced their performance so far, witnessed a 3.4 per cent decline in revenues and a 7 per cent decline in post-tax earnings. The companies that have announced results so far are Rhone Poulenc, Novartis, Hoechst Marion, Parke Davis, Pfizer, E-Merck, German Remedies, Knoll Pharma and SmithKline Pharma. Among these, Rhone Poulenc, Pfizer, E-Merck and SmithKline Pharma were on a better footing than some of their MNC peers, such as German Remedies, Novartis, Parke Davis and Knoll Pharma, which recorded negative earnings growth rates in the July-September quarter.

...and the dull ones

Commodity sectors -- a mixed bag: In line with the first quarter performance, sectors such as steel, petrochemicals, paper and non-ferrous metals fared well, but the cement industry is still dogged by lower price realisations and production volumes.

Steel prices, on an uptrend from early this year, started flattening out by July-September. However, good export volumes and relatively high prices vis-a-vis the previous year's price levels helped Tata Steel turn in a spectacular performance and Steel Authority of India to reduce its losses sharply.

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The paper and paperboards industry saw firm price trends in the quarter. Most players in this sector, mainly Tamil Nadu Newsprint, ITC Bhadrachalam and Ballarpur Industries, recorded impressive performances between July and September. This trend is slated to continue for some time.

Similarly, the two key petrochemical giants -- Reliance Industries and IPCL -- recorded good performances in the latest quarter, bolstered by sharp volume growth and higher product selling prices, which mitigated the rise in feedstock cost (on account of higher crude prices) to a large extent.

For the second quarter in succession, the performance of the cement industry proved disappointing as production volumes dipped and realisations came under pressure across the country. Though prices in South India were relatively better than in the Northern and Western markets, both India Cements and Madras Cement failed to capitalise on this differential. The pure cement majors, including Gujarat Ambuja and ACC, were hit by the lower price realisations and sluggish domestic demand.

Economy-sensitive segment disappoints: The economy-sensitive sectors continued to reel under the influence of a slowdown, with the engineering, automobiles and refining sectors showing no signs of recovery.

The automobile industry was hit by the economic slowdown, with the light/heavy commercial vehicles segments bearing the brunt. The performance of commercial equipment majors, such as Tata Engineering (which was hit by lower demand and higher emission compliance cost), Mahindra and Mahindra and Ashok Leyland, clearly reflect the slowdown in this segment.

The engineering sector, represented by Ingersoll Rand, Atlas Copco and Tata Honeywell, continued to record negative earnings growth, reiterating the overall state of the economy. However, the silver lining was Cummins India, which bolstered its performance mainly through the export of engines.

Similarly, the earnings performance of the refining majors -- Indian Oil Corporation and Hindustan Petroleum -- was affected by lower refining margins in the July-September quarter. The rise in crude prices hardly provided any relief. The performance of standalone refineries, such as Chennai Petroleum Corporation (formerly Madras Refineries) and Kochi Refineries (formerly Cochin Refineries), was also badly hit by the volatile crude prices and reduced margins for finished products. Without the cushion of marketing margins to supplement the refining margins, their earning streams were even more severely affected.