As most companies have now reported their results for the quarter ended March this year, a common trend has become apparent. Profit margins of companies are clearly under pressure because of the steep rise in commodity prices. Only the firms in the commodity space have benefited from the upsurge in the prices. An analysis by FE of 1,885 companies shows that though the top line of companies have grown 30% year-on-year, operating margins are lower by 270 basis points during the same period, on account of higher raw material prices that have gone up by a whopping 811 basis points for the same sample of companies. The main saving grace for companies, in the quarter ended March, was the 21% decline in interest expenses, one of the main reasons for the much better-than-expected top line growth. These numbers may disappoint the Street as they are not at all encouraging at a time when the markets are turning volatile. The numbers may also be indicative that the chances of earnings upgrade are not too high for the next few quarters. Analysts say that except for the automobile sector, which has seen a strong volume growth, there won?t be too many earnings upgrades.
But the Greek crisis, which is now gripping the whole of Europe and indeed global confidence, has precipitated a sharp drop in commodity prices across the world. Indian companies may actually benefit from this fall during the quarter ending June. Steel prices are down by around 25% since April this year, which will bode well for industries like automobile, heavy engineering and construction. Similarly, crude prices are down to $71 a barrel from the peak of $84 a barrel in April. Going ahead, some of the macro factors like exports and factory output are showing favourable trends for Indian companies and there are early indications of a normal south-west monsoon this year. All these factors will bode well for the corporate results. Of course, the current phase of growth in the corporate sector is going to be investment-led, as seen in the strong order pipeline of companies in the infrastructure, construction and power sectors and the cues will emerge more clearly in the quarter ending June this year. However, companies will have to continue with their efficiency drive and reduce operating expenses just as they have done during the peak of the global credit crisis.
