India Inc is on a roll; Q2 confirms growth momentum

Kishor Kadam & Vishal Chhabria

MUMBAI: India Inc is on a roll and there’s no doubt here. A little earlier, the GDP and industrial production growth figures had broadly confirmed that the economy continues to grow at a healthy pace. This time around, the performance of listed companies in the three months ended September, 2006 (Q2), reinforces the fact.

To gauge the performance of corporate India, DNA Money crunched the numbers of 590 manufacturing and services companies (excluding banks and finance companies) who have declared results so far. The verdict: better than expected.

The aggregate results for 590 companies, which together accounted for 50% of the market capitalisation of the Bombay Stock Exchange, indicate that net sales grew at 31.6% to Rs 221,600 crore, while their operating profits (excluding other income) grew at a far better rate of 38.7% to Rs 38,639 crore, enabling operating margins to rise 90 basis points to 17.44% (100 basis points make 1%). At the net level, profit grew by a whopping 45.9% to Rs 24,194 crore, consequent to significantly slower growth in interest (22.3%) and depreciation (10.6%).

Interestingly, there is no significant divergence in performance even if the aggregate performance is viewed in terms of the size of companies. For instance, 38 big companies (those with net sales of over Rs 1,000 crore), which accounted for 68.5% of the turnover, have seen their net sales grow by 33.6% to Rs 1,51,880 crore, while net profit is up 41.5% to Rs 17,147 crore, even as other income grew a mere 3.3% to Rs 2,930 crore.

This is despite the mixed role played by large companies like HPCL, Reliance Industries, ONGC and companies from the IT sector. For instance, HPCL turned in a profit of Rs 1,222 crore against a loss of Rs 22.14 crore in the corresponding quarter. While ONGC reported a paltry 0.86% rise in net profit to Rs 4,173.98 crore, Reliance’s profits grew marginally by 9.2% to Rs 2,709 crore. On the positive side, eight tech companies reported a 59.2% rise in net profit to Rs 3,534.32 crore during the quarter.

Medium sized (Rs 100-Rs 1,000 crore) companies, totalling 202 and accounting for nearly a fourth of aggregate figures, reported a good show with net sales rising 27.9% to Rs 58,253.07 crore, while net profits shot up 63% to Rs 5,909.8 crore. This is probably an indication that the boom is impacting a wider spectrum of the economy.

Among top performing industries (by net profit growth), metals reported the largest growth in net profits at 492% to Rs 1,043.63. However, only three major companies (Hindalco, Jindal Stainless and Ispat Industries) figured in the list as other big ones like Tata Steel are awaited. Here, while the performance is not identical, most reported a good improvement in performance, including Hindalco and notably Ispat, which turned around from a loss of Rs 363 crore to a net profit of Rs 2.3 crore. The latter two made the difference. In refineries, as mentioned earlier, HPCL made the big difference, while in tech, the eight big-to-medium companies-87.7% of sector profits (including Tech Mahindra, i-flex, HCL Technologies and Patni, which reported net profit growth ranging from 90-373%), clearly made the difference.

Similar was the case in pharmaceuticals, where the big seven (77.6% of profits) reported an 82% gain in profits. Here, Ranbaxy (753.8% net profit growth) and Dr Reddy’s (153.5%) were the top two performers, beating the average profit growth by a wide margin.

In the other two big industries, viz., cement and engineering, the story is well-known and companies should continue their good show over the next few quarters. In telecommunications, Bharti Airtel stole the lime-light as MTNL reported a 25% decline in profit to Rs 121 crore and Tata Teleservices (Maharashtra) reduced its losses. Here, the results of VSNL and Reliance Communications are awaited. Lastly, in automobiles, with the exception of motorcycle companies, M&M and Maruti have reported good numbers, beating analysts’ expectations too. Here, results of Tata Motors and Ashok Leyland are awaited. Among dark horses, shipping did well, especially the top two. GE Shipping and SCI reported a 61%/89% rise in net profit.

So, far the going is good. External factors like steady interest rates in the US and decline in crude prices augur well for the industry. Contrarily, the Reserve Bank may hike domestic rates by 25 basis points during its policy announcement this week. Additionally, the real impact of a possible US slowdown is not yet known. However, given the strong domestic story, most companies should continue to report good numbers. But one thing is very clear. Not all companies will do well, which is also evident from the results. The trend shows that bigger companies have fared well, while their chances of their doing well in future too are equally good. So, to earn higher investment returns, obviously, one will need to be very selective while stock picking.