Corporate sector results for the April-June quarter were eagerly awaited as the first test of the green-shoots-of-recovery hypothesis, being advocated by the government, RBI and some commentators. The results thus far throw up a rather mixed picture. Net profit of a majority of companies is higher than in the quarter before, but sales?except rural sales that still remain buoyant?are still declining. Aggregate net sales of 500 companies (we exclude banks and finance companies, as they distort the margin picture) rose by just 0.1% on a quarter-by-quarter basis. Net profit, on the other hand, saw a 25% increase. If compared year-on-year, net sales have actually shrunk by 0.4%, net profit has remained positive at 14.6%. The uptick in margins clearly shows that companies have adopted aggressive cost rationalisation measures, and that the reduction in raw material prices has helped them report better bottomline growth. While the quarter will certainly be credited for an impressive result overall, margin pressure is expected to build up in the subsequent quarters and the market will have to look for sales-driven growth for companies, rather than strong performance led by operating metrics alone?the latter is not sustainable.
On the downside, a combination of weak commodity prices have hurt revenues for the larger oil and metal companies, while slower order flows that have reduced sales for capital goods makers, have proved a drag on the overall topline of companies for the June quarter. Since most of the inventory piled up at factory gates has been cleared by now, it will indeed be a challenging task to push new sales going forward. The laggard sales growth is evident from the latest RBI data which shows that while deposit growth with banks remains buoyant at 21.9%, credit growth has slowed to 16.6% year-on-year. As more results come out in the next two weeks, we may get a clearer picture about whether the rise in profit margins was a tradeoff with growth. And with capex plans of many companies still on hold, it will remain a debatable balance in the medium term. Moreover, if earnings do not grow as fast as share prices, the price earning multiple will bloat, something that will not bode well for the companies and the stock market in the medium to long-term. At a disaggregated level, the quarter sprang few surprises. Results of IT heavyweights were maybe better than what the market had expected. And perhaps, as expected, auto, telecom and FMCG companies reported better results on the back of healthy sales growth in rural areas. But whether rural demand growth will still remain buoyant in the subsequent quarters remains to be seen?it depends on how the monsoon plays out.