India Inc Sweats as Sales Grow Slowest in 2 Years

Heat Stroke! Top companies are bearing the brunt of policy inertia. Sales are lagging at a time monsoon is threatening to play spoilsport. Hard days ahead for corporates India's top 50 companies have been hit by the double whammy of slowing demand at home and abroad for the quarter ended June 30, resulting in sales growing the least in nine quarters and the rise in net profit declining to single digits.  The net sales of Nifty 50 companies, the largest firms by market capitalisation, are likely to rise 16%, the slowest in nine quarters, while net profit is likely to grow just 7%, according to estimates compiled by the ET Intelligence Group.  Reliance Industries, Tata Steel, Sterlite Industries, DLF and Hindustan Unilever are likely to report sluggish top line growth for the first quarter of this fiscal as Asia's third-largest economy struggles to regain momentumagainst a backdrop of governance issues and policy inertia, which are weighing on Corporate India, especially those executing infrastructure projects in the country.  "In order to get India out of this funk, a few critical issues need to be addressed quickly. Issues around infrastructure and power need to be sorted out, GST needs to be introduced and the government must be seen to lead. The leadership quotient in the government today is close to zero. One cannot address poverty, progress and growth if there is no clarity around the future direction of policy," says Tarun Kataria, CEO (India), Religare Capital Market. Weak Demand from Consumers  The likely performance in the June quarter is in stark contrast to the performance of Nifty companies in the March 2012 quarter that was broadly in line with the projections of ETIG for that quarter. Revenue grew 27% compared with the estimated 25.2% while net profit rose 19%, higher than ETIG's projection of 14%.  The expectation of slower sales growth reflects weak demand from consumers and industry. For example, though passenger car sales rose for the seventh straight month in May 2012, the growth rate of 2.7% year-on-year was the lowest in as many months. Loan growth, too, has remained range-bound at 15-16%, lower than 18-20% a year ago. All this, experts say, indicates weak sentiment across local and external markets.  Although growth on both the revenue and net profit fronts will be lower, operating profits are likely to rise by about 22%, largely due to improved margins which some companies within the Nifty universe are expected to report. Pharma companies such as Dr Reddy's Laboratories, Ranbaxy Laboratories and Sun Pharmaceuticals are expected to show robust operating profit growth backed by a strong double-digit growth in sales.  Information technology exporters—HCL Technologies, Infosys and TCS—will also be at an advantage when it comes to operating profits and profitability thanks to a 7-17% slide in the rupee against major currencies in the June 2012 quarter when compared to the same period in the previous fiscal.  Centrum Wealth Managers' Executive Director and Chief Investment Officer G Chokkalingam says: "Growth is under pressure for the (past) few quarters and the only companies which are driving up the numbers are those benefiting from the consumption-driven demand. Going forward, the critical factor for the revival of the economy will be how the monsoon pans out."  Rating agencies and most brokerages say the current state of limbo could continue in the near term. A recent report from credit rating agency CRISIL said fixed asset investment in FY12 was the lowest in five years. Companies will find it challenging to increase capital expenditure as interest rates are still relatively high. According to CRISIL, the interest coverage ratio, which measures a company's ability to generate operating profit sufficient to cover the cost of debt servicing, fell to a three-year low.  Another concern is a weakening local currency, which will deprive companies of their ability to take full advantage of lower commodity prices.  (With inputs from Apurv Gupta)