A look at headline numbers for the September quarter might suggest India’s corporate sector is coping fairly well with the economic downturn; after all, net profits for a clutch of 1,820 companies are up a handsome 22% yoy. However, the boost to the bottom line has come from a big jump in other income, some savings on interest costs and no major outgo on account of depreciation. The reality is that at an operational level, profit margins have contracted. Moreover, while there have been some star performers like a TCS or a Mahindra & Mahindra, the disaggregated data tells an altogether different story. And that is how corporates are struggling to grow top line and how they are clamping down on costs to make ends meet. Given how caught-up they are in trying to negotiate a tough environment, they’re not in a position to think about the future and are, therefore, not even planning for new capacity, let alone adding it.
But to get back to the basics, top players including the likes of Hero Motocorp—whose revenues fell 11% yoy—have all but lost pricing power; others like Hindustan Unilever aren’t able to sell enough volumes. While the consumer goods players are no doubt in trouble with household incomes hurt by inflation, the bigger concern is the pain in the core sector; Tata Steel missed stand-alone ebitda estimates with price realisations not coming in as expected while Reliance Infra’s revenues fell 11% yoy. The realisation per vehicle at Ashok Leyland fell 16% yoy and even at Tata Motors the fall was as much as 7.5%. How tired volumes are can be gauged from the fact that net sales for the pack of 1,820 companies are up barely 11% at a time when wholesale inflation is averaging 7.5%. Moreover, the relatively elevated prices of raw material continue to hurt margins—SAIL’s ebitda margin, for instance, was dented by 200 basis points yoy.
The key takeaway from the results, and the big disappointment, is that capital expenditure appears to be virtually at a standstill. Given that State Bank of India’s outstanding advances, at the end of September, were 25% lower than they were in June, it would appear that companies are in no hurry to expand their operations. Also, the depreciation data has been flat for three quarters now while order books of engineering firms remain weak. Bhel’s profits fell 10% yoy on flat