The initial profit numbers from corporates for the December 2013 quarter appear impressive—net profits for a sample of 56 companies (excluding banks and financials) are up 20.7% yoy compared with an increase of 17.2% yoy in Q2FY14. A closer comparison with the results for the September quarter however shows the bottomline, this time around, has been boosted by a big jump in other income of 32% yoy; also, companies have managed to keep costs, other than those for raw materials, in check.
More important, the topline growth in Q3FY14 is a much lower 13.5% yoy than the 17.5% yoy seen in Q2FY14, despite the fact exporters would have benefited from a weaker rupee. While the IT pack has done well for itself in a challenging environment—Infosys reported a 25% jump in revenues and TCS a smart 50% yoy rise in net profits to R5,315 crore—and a few others like ITC have managed to beat the slowdown posting a sales growth of 13% yoy, many have found the going tough. Reliance Industries Limited (RIL), for instance, reported flat profits of R5,515 crore, as refining margins remained weak and prices of petrochemicals stayed under pressure.
Smaller companies continue to reel under the impact of a slowing domestic economy, and with retail inflation ruling at 10% levels, discretionary spends are on a leash as seen in the 12% yoy fall in volumes and the 5.2% yoy drop in Bajaj Auto’s sales. Given that average realisations per unit for the motorcycle player were smaller in Q3FY14 than in Q2FY14, pricing power seems to be elusive. While the current sample doesn’t include capital goods firms, the fact that capacities aren’t being expanded is reflected in the drop in depreciation charges during the quarter as also in the muted loan growth—at Axis Bank corporate loans grew just 3% yoy with total advances—adjusted for FCNR deposits going up by just 15% yoy. The HDFC management confirmed that the private sector remains reluctant to invest pointing out that much of the gains the lender had made in the corporate loan segment in Q3FY14, were market share gains. That would suggest it could be a while before economy starts picking up momentum—perhaps another six months—and therefore, that corporate profits will remain subdued, except perhaps for the IT space. TCS MD&CEO, N Chandrasekaran has said FY15 will be a better year for his firm than FY14 but right now it’s unlikely too