Corporate results show a struggling economy

Updated: Jan 31 2002, 05:30am hrs
The Indian manufacturing economy is in trouble. If there was any further evidence required, that was provided by the third quarter results of companies that have been coming out in the last few weeks. In terms of the present listing guidelines, companies need to come out with a quarterly earnings report within one month of the closure of the quarter. Disclosure norms have been further refined and from this quarter we have segment wise reporting of results that helps investors and analysts cut through the numbers and see which parts of large corporations make money and subsidise the others.

Last quarter, the deferred tax element was built into the reporting. In other words, where there tax planning had been done by companies and because of that the tax had been deferred, this needs to be dimensioned by the company and shown to investors. This has helped a great deal in our understanding of the true profits. Given that large listed companies represent the cream of Indian business, they would probably be doing relatively better than the whole corporate sector. For example, one is sure that small scale units would be generally struggling as compared to these.

On a broad brush, the industrial growth has slowed down and this fact has been known for sometime. What analysts were more interested in was to see how specific industries were performing. That was the importance of the third quarter results. Firstly, one saw the impact of the companies in the new economy, which should include information technology, telecom and the media. Indias IT industry is US focused and was already feeling the pressure due to the recession in that country dating to the beginning of the last year. The events of 11th September only compounded the situation and considerable interest was shown by investors in seeing how badly domestic IT were affected by this. When the results did come out, we saw that the IT sector in India had stood up pretty well and was still showing a growth in the region of 30-40 per cent. There was pressure on growth of business and the billing rates. However, in general the fortunes of the IT industry were far better than those of their counterparts in the US.

The core manufacturing economy, however, did not come out with anything much that was positive. The steel sector was one which investors are watching closely since its a true barometer of economic revival. Unfortunately, the results that came out from both Tisco and Steel Authority of India were most disappointing. While Tisco did manage to make a profit, it was far less than the same period last year. In the case of Sail, it was a huge loss. It appears that domestic demand for this basic industrial product has remained very soft. Coupled with this, has been the fact that there is considerable dumping of steel from the Far East and countries of the former Soviet block. As if all this was not enough, we are also seeing a situation where Indian exports are facing severe anti-dumping measures in the US and in the European Union.

The negative news coming from the steel sector could also be seen in many other sectors such as textiles, chemicals, engineering and construction. A good barometer to understand the extent of this recession is the financial sector. In a way, it is already known that sluggishness in the economy has led to poor off take of credit from the banking system. It is having massive access to liquidity and as against the SLR requirement of 25 per cent, many banks hold SLR securities of even 40 per cent. In other words, they have no other place to park their money. This has led to a big reduction in profitability and margins. Secondly, when industry is in recession, the marginal ones are the worst affected. This translates into sickness in large segments of industry and when companies go sick, they stop paying interest and repayment installments. This is what exactly we saw in the financial system. IDBI, which is the biggest financial institution reported disastrous results due to huge provisioning of bad loans. While some very well run banks managed to make a decent show, some newer banks have shown losses. This is surprising since they have started in a reformed environment and should not have the baggage which the nationalised banks have. But it looks as if in their eagerness to grow they have thrown caution to the winds. No wonder these banks like Centurion Bank and Global Trust Bank are freely talked of as takeover candidates.

There are some silver linings though. The automobile sector seems to be slowly coming out of the woods. Telcothe giant among them, is still losing money but much less than before. Obviously, the pickup is visible in commercial vehicles and cars. The two-wheeler industry is moving quite smartly but tractors are sluggish. Rural prosperity appears a distant dream. It is surprising that the agricultural growth is not translating into rural demand. Farmers are facing a glut in food grains. Even well known multinationals operating in the health care and personal product segments are seeing tremendous pressure on their profit margins. However, due their low debt, they are somehow managing a decent profit.

Policy makers need to take these results very seriously and not dismiss them as news relevant only for the stock markets. Quite often we find they concentrate too much on macro factors.But jobs are created in the market place and banks go bad through specific corporate loans. When industry is down in the dumps, tax collections go down and then the whole system goes haywire. There is a lot of information available in these three quarter results that should help them in formulating budget strategies. The need of the hour is to come out with specific solutions which can take the domestic industry out of the quagmire. The union budget may be a good occasion for policy makers to use this information to advantage.

The author can be contacted at pnvijay@vsnl.com