Revenues Grow Slowest in 9 Quarters as Inertia Makes India Inc Arthritic RANJIT SHINDE & SHAILESH KADAM ET INTELLIGENCE GROUP
Revenues of India's top companies grew at the slowest pace in nearly three years and net profits by a meagre 0.5% in the quarter to June as rising interest rates and input costs and a slowdown in investments — mainly because of policy inertia — squeezed profitability.
An analysis by the ET Intelligence Group of the quarterly results of over 1,400 companies, excluding firms in banking, finance and petroleum, shows that revenues expanded by 14.3%, which was the lowest in nine quarters. Net profits rose just 0.5% in the first quarter of 2012-13 from a year ago as higher financing costs started to bite.
Though this appears to be better than the slide of 10-15% in net profit during the two quarters to December 2011, it is way too low compared to the growth of 6.4% a year ago or during the June 2011 quarter.
What is worrying is that at a time of weak top line or revenue expansion, interest and input costs continue to spiral, reflecting the inability of companies to pass on the cost burden to end-users. The proportion of raw material costs to net sales jumped to a ninequarter high of 36.6% from 35.5% a year ago while the share of interest expense in sales topped 3.6% for the first time since June 2009, when it stood at 2.7%.
Interest costs shot up by 42.6% year-onyear in the June quarter, marking the fourth successive quarter in which interest outgo rose by more than 40%. Interest costs had increased the most, by 60%, for the sample of companies in the quarter to September 2011 — a period when the RBI was raising interest rates to combat inflation. In April this year, the central bank reduced interest rates by 50 basis points, or 0.5%, but Indian companies — hurt by 13 successive interest rate hikes since 2009 — have been complaining that high rates are weighing down performance. Weak Ability to Service Debt
The sustained increase in interest outgo has weakened the ability of Indian corporates to service outstanding debt as reflected in the interest coverage ratio — a measure of a firm's ability to pay interest on borrowings. This ratio, which is arrived at after dividing profit before interest & tax (PBIT) by the amount of interest cost in a period, fell by 250 basis points from the June 2009 quarter to a three-year low of 4%. The trend of higher costs pulled down operating margins by 40 basis points to 16.3% in the June quarter from a year ago. The operating profitability of the sample has declined substantially from 18.6% nine quarters ago, reflecting spiralling costs. "Companies are relatively more leveraged now since raising equity has become difficult. This has resulted in higher interest costs," says Samiran Chakraborty, regional head of research (South Asia), Standard Chartered.
The share of borrowings in total capital market funds soared to 95% in the June 2012 quarter from over 80% a year ago, according to the latest report by ratings agency CARE. The higher emphasis on debt at a time the top line is under pressure due to slowing demand means interest outgo is likely to impact India Inc in the near term.
The cost of raw material relative to sales continued to increase even though commodity prices cooled off globally in the past six months. Chakraborty attributes this to the lag effect in the impact of change in input prices. "Companies tend to book imported raw materials 45-90 days in advance. This means that any change in prices during this period will only be reflected in the coming quarters." This also suggests that companies may report a marginal softening of imported input costs in the next few quarters. Leading indicators such as trend in capital expenditure and credit offtake by the industry suggest that the performance of Indian companies will remain muted in the next few quarters. In their latest report, CARE Economists Madan Sabnavis and Anuja Jaripatke Shah draw attention to the slowing trend in industrial credit. Credit offtake by the industry, or loans, grew by 2.1% in the June 2012 quarter, slower than the near-3% growth a year ago. Besides, a major proportion of the credit was attributed to industrial sectors, which reported a fall in production during the quarter. This hints at the possibility that companies may have taken recourse to borrowings to fund working capital requirements in the backdrop of falling revenue.
Falling capital expenditure is equally worrisome. According to latest data from the Reserve Bank of India, capex for new and existing projects fell by 11% in FY12 even though overall investments in the economy grew by nearly 5%. "Capex on new projects has been falling for the past three years. What should be alarming this time around is the sharp decline in the expenditure on existing projects," points out Chakraborty of Standard Chartered. Expenditure on existing projects dropped by 46% in FY12. A falling capex cycle signals an extended period of stagnation in the economy.  |
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