It?s almost certain now that corporate India will report a very small increase in profits, for the three months to June 2011, relative to that in recent quarters. Data mined from a fairly well-diversified sample shows that while volumes are growing and there is selective pricing power, the high cost of inputs is hurting. As such, for a clutch of 668 companies (excluding banks and financials) the top line has grown at a strong 26% y-o-y, better than it did in the March 2011 quarter. However, high raw material costs?up nearly 350 basis points as a share of sales?have dented operating profit margins, which have dropped 215 basis points y-o-y. Consequently, net profits have risen at a very slow 13% y-o-y in the June quarter compared with a strong 24% y-o-y in the March 2011 quarter. What?s worrying is the sluggish pace of orders and execution in the critical capital goods space. At BHEL, the order backlog slowed to 8% y-o-y in the June 2011 quarter as new orders fell 77% y-o-y. Whether the management can grow orders by 10% y-o-y this year, as it hopes to, is a bit of a question mark, given coal shortages, competition from China and the poor finances of the State Electricity Boards (SEBs). Smaller engineering firms like Thermax, too, are seeing order inflows taper off. Indeed, the power sector itself didn?t fare well, with JSW Energy reporting a 54% drop in profits and prompting analysts to warn that the results underscored fuel costing issues, weak state utility finances and merchant pricing risks. In fact, power generation at NTPC actually fell during the quarter, possibly due to SEBs backing down from buying contracted power. Moreover, merchant realisations are coming in much below estimates as reflected in the weak numbers posted by Jindal Steel and Power. That the economy is giving up pace is evident from the slippage in profits at commercial vehicle player Ashok Leyland where they crashed 30% y-o-y on the back of falling sales volumes. In the meantime, inventories are piling up and increased to 10,000 vehicles at the end of June.
The news from the consumer space isn?t as depressing; Hindustan Unilever and Asian Paints, for instance, have managed to push through volumes. However, there are those who are feeling the heat of competition; at Bajaj Auto, the numbers were a tad disappointing, driven by a less favourable product mix, resulting in lower-than-expected realisations. Perhaps nowhere is the slowdown as evident as in the banking space. For a sample of 38 public and private sector banks (excluding SBI) net profits have risen just 7% y-o-y, partly because of the jump in provisions but also because the net interest income hasn?t really grown at a very fact pace.
