FE Editorial : Bad start to the year

Written by The Financial Express | Updated: Feb 1 2011, 04:58am hrs
If the collapse of the stock market in the first month of the year hasnt been bad enough, inflation levels dont look like theyre going down in a hurry and, now, India Incs bottom line growth is also slowing. Top line growth for a common sample of 611 firms (excluding banks and financial institutions) has fallen to 19.5% from 21% in the previous quarter and bottom line growth is also down. The growth in net profits at 17.6% for the December quarter is actually an overstatement since other income grew at a faster pace as compared to the previous quarter (25% and 8.3%, respectively)on an apples-to-apples basis, net profits for the sample firms grew 20.7% in the September quarter and this fell to 16.1% in December. The slowdown in India Incs performance was, of course, always expected because of the high base effect coming into play, but the macro-environment has been deteriorating for a while with wholesale inflation ruling at 8.5% or more in 11 of the last 12 months.

What had not been factored in was the extent to which high prices of commodities could play spoilsport, the extent to which the government would be a helpless bystander, the slowdown due to environment-led issues, due to the stalemate in Parliament, and so on. So while its not too much of a surprise that JSW Steels margins have come crashing, it is a shock that order books at two of the countrys biggest engineering firms have fallen by more than 25% year-on-year. Consumer giants like Hindustan Unilever havent even been able to hold on to their bottom line, let alone grow it. Total expenditure has risen more than the top line, pushing down operating profit margins by nearly 90 basis points year-on-year. The recovery seen in the tech space has been reassuring but that apart, theres little to suggest that corporate profits are going to remain as robust in the near term.

Since theyre buying neither coking coal nor palmolein, banks have done brisk business in the December 2010 quarter, turning in strong pre-provisioning profits, up more than 31% year-on-year for a clutch of 33 banks. The star performer is HDFC Bank, which seems to be able to hang on its margins and keep its loan book as clean as ever no matter what. But with interest rates set to move up further, the cost of funds cant stay at current levels, and if investment is slowing, who are banks going to lend to While consumer demand remains fairly strong, watch out for some earnings downgrades.