It would appear, prima facie, that India Inc has scored a home run once again. The aggregate net earnings of around 225 companies declared so far for the second quarter of the current fiscal is 30% more than that of the same period in the previous year. While this should be reason enough to uncork the bubbly?this is the tenth straight quarter in which earnings growth has been in excess of 25% year-on-year?there are some aspects of concern that threaten to dampen the party. One is the skewed nature of the earnings, with a few heavyweights like ICICI Bank and Reliance Industries disproportionately dominating the proceedings. Indeed, more than 50 companies have reported lower earnings growth this quarter. Normally robust IT companies have also seen subdued growth in bottomlines thanks to the rupee?s appreciation. However, as a silver lining, things could have been worse had it not been for some smart people?and some smart cost management.
Importantly, though, the fact that other income as a percentage of profit before tax has grown by five percentage points in the second quarter over the previous quarter suggests that companies have made a killing from income unrelated to their businesses. Earnings from foreign exchange transactions, investments and even a change in accounting norms have helped prop up the earnings figures. Otherwise, it was logical to expect a lower growth in profits as revenues have grown by a more modest 17% over the previous quarter, the lowest in the last 10 quarters. Here as well, large players like Hero Honda and Ranbaxy have shown a dip in their toplines. This is cause for serious concern, as India Inc seems to be stretching its act of reporting strong quarterly results. At first cut, it seems corporates have managed to build in productivity, as operating margins have jumped, and this is commendable. But then a large part of this is due to the rising rupee making imported inputs, especially petroleum products, cheaper. Not all of the savings would have emanated from increased operational excellence and could be temporary in nature. Rising interest rate costs have started burgeoning, too, and will soon start having an impact. A few more results, as well as the next quarter, will certainly bring corporate India?s performance into starker relief. And it might prove too early to pop the bubbly after all.
