India Inc's sales growth rate at 10-quarter low

The fourth-quarter sales growth at 10.3 per cent for manufacturing and software services companies (excluding oil marketing companies, refineries and banks) confirm a demand slowdown for India Inc.

The sales growth rate has been a 10-quarter low, dragged by slowdown in the key sectors -- capital goods, construction, infrastructure, non ferrous metals, steel and telecom -- that had contributed to India Inc's growth story in the past.

Automobiles, banks, fast moving consumer goods, oil marketing companies, pharmaceuticals and software companies were growth drivers in the fourth-quarter net profit, up 16.6 per cent over the level of a year before. Globally, exposed sectors like metals (both ferrous and non ferrous), telecom, speciality chemicals, petrochemicals and textiles reported one of the worst performances in the recent past. On the domestic front, the slowdown was seen in capital goods, construction, and power sectors, as capital expenditure plans were put on hold due to rise in the cost of borrowing.

Fourth-quarter results confirm India Inc's worst fears. Key points:

* Sales growth rate slipped around 10 per cent to a 10-quarter low

* Operating margins remain under pressure

* Tata Motors, OMCs, banks and IT sector arrested the steep fall in net profit

* Capital goods, construction, metals and telecom sectors hit the bottom

Kamlesh Kotak, head, equity research, Asian Markets Securities, said: "A least for the first half of the current fiscal (financial year), the situation is not likely to see any improvement, as rupee volatility has further increased the risk of mark to market losses (writing down assets to reflect current values) of companies that have taken overseas debt."

Even external commercial borrowing has not remained a cheap source of funds due to the rupee volatility, he added. Kotak said a higher share in bank credit growth for working capital purposes and stagnancy in new capacity expansion will be cause for worry.

The slowdown in sales growth put pressure on the net profits of the manufacturing sector. However, thanks to superficial profits for oil marketing companies and a strong show by Tata Motors, banks and software companies, aggregate net profit of the 2,260 companies rose by a handsome 16.6 per cent. If one excludes profit-heavy sectors and companies from the sample, the net profit of the remaining sample was down two per cent. Among weak performers, the telecom sector as a whole slipped into the red, while construction, metals and power sectors recorded a sharp dip in net profit.

A POOR SHOW  The quarterly numbers of a sample of 2,260 companies show a marginal improvement over the previous quarters only if oil companies, oil marketing companies and banks are included. If these three are taken away, the results show a decline, or slowdown.
Quarterly growth rate                                                                                                                                                   (%)
	Sales				Net profit
	Jun,'11	Sep,'11	Dec,'11	Mar,'12	Jun,'11	Sep,'11	Dec,'11	Mar,'12
Total sample	21.79	16.76	20.58	15.23	14.13	-39.00	-6.18	16.63
Without  oil, OMCs,   banks,Tata Motors	17.12	13.45	13.66	10.28	11.59	-25.18	-10.66	-1.54
Cos with high RM*	28.59	21.62	27.55	18.85	18.54	-73.27	-20.89	13.56
Tata Motors	24.24	26.95	44.58	43.99	0.55	-15.55	40.47	136.36
OMCs	32.81	23.97	51.56	33.62	33.90	Loss	310.85	256.6
Automobiles	19.95	18.30	26.69	30.04	7.82	-12.94	20.52	67.72
Capital goods	20.87	17.49	14.60	9.58	57.97	3.68	-15.40	-1.15
Cement	32.54	25.28	28.84	20.16	31.09	115.7	80.74	-1.07
Construction	20.64	10.31	12.60	3.52	-18.96	-32.06	-43.88	-59.58
FMCG	19.21	18.17	19.43	18.41	24.11	19.98	19.39	29.74
Base metals	39.87	30.70	15.38	7.74	52.48	11.85	-13.91	-23.04
Pharmaceuticals	9.92	13.04	25.20	23.81	3.49	-81.37	Loss	36.03
Power	18.49	28.04	31.83	28.85	11.37	-19.92	-15.78	-17.78
Steel	23.95	16.66	17.03	10.64	40.48	-85.06	-73.66	-48.19
Telecom	2.75	1.57	2.01	2.09	-83.25	-88.81	-86.39	Loss
* Companies with raw materials costs over 25% of net sales

The 2,060 companies that have declared their results recorded sales growth of 15.2 per cent, a slower pace of growth compared to the previous three quarters.

The cost of production remains high on a year-on-year basis, up 500 basis points compared to growth in net sales.

Interest cost was up 38 per cent, at a marginal slower pace than the 42-50 per cent rise in the earlier three quarters, indicating some relief on mark to market losses on foreign currency loans on account of appreciation of the rupee over the sequential quarter.

The best performing sectors have contributed to the profit and sales growth, but there have been best and worst performer companies within sectors.

For example, consolidated results (including JLR) of Tata Motors helped the auto sector to grow 30 per cent and a healthy profit growth of 68 per cent.

But the stand-alone performance of Tata Motors (sales up 14 per cent and profit down two per cent) and others reveals the domestic auto market has hit the slowdown lane.

Ashok Leyland and Maruti Suzuki also showed strain in the domestic car market.

The slowdown also hit the motorcycle segment, with Bajaj Auto and Hero Honda reporting net sales growth just above 10 per cent.

Capital goods and engineering giant Larsen & Toubro led the sales growth, while the power equipment maker BHEL managed a modest single-digit growth in net sales.

Sales growth remains weak for other power equipment makers such as ABB and Crompton Greaves.

The cement sector showed regional strength, with southern-based India Cement, Chettinad Cement and Madras Cement seeing strong growth in sales and profit.

Softening of base metals prices in the international markets and slowdown in demand from China hit hard on aluminium, copper and zinc makers, with Hindustan Zinc, Hindalco, Nalco and Sterlite Industries feeling pressure on demand and margins.

Steel makers also suffered due to weak demand and softening of prices, with sales growth slipping to 10 per cent from 17-24 per cent in the first three quarters.

No wonder, the net profit of steel companies declined sharply by 48 per cent.