When chief executives talk only about the stock market at a meeting, it?s time to worry, a CEO-turned-fund manager told me recently, exasperated at the fact that at a breakfast meeting of such top bosses, the soaring Sensex was the chief topic of conversation. This CEO had a few simple questions: tell me, he said, if oil prices are shooting through the roof, wage bills are increasing, raw material costs are soaring and interest rates are on the rise, how does this translate into supernormal profits quarter after quarter? Or is it that the CEOs, with more than an eye on the stockmarket, are setting aside the provisioning for later quarters? A valid query, given all the recent talk of a slowdown in corporate earnings, the rising rupee and oil prices nudging $100.
Figures compiled by FE Research Bureau show that 2,985 companies saw a combined sales growth of 13.5% in the quarter gone by, while, significantly, other income grew much higher at 29.3%. Combined net profit was up 20.5%, while operating profit of these companies put together grew 25.4%.
A detailed analysis of sequential figures of 1,799 companies?from 2002 till the second quarter of FY08?tells a stark story of how India Inc is up against more than just a few challenges. Whether it is interest costs, the impact of the rupee or employee expenses, there are clear signs that running a corporation is no longer a breeze.
Consider the FE Research Bureau figures: in the second quarter of FY08, interest costs of 1,799 companies was up 44% on a year-on-year (y-o-y) basis. This figure was similar the previous quarter, when interest costs were up 43.4% y-o-y. The quarter before that (fourth quarter of FY07) saw this figure at 45% y-o-y. But the pressure is clear when one sees the interest costs figure for the third quarter of FY07, which was up a much lower 31.3% y-o-y. Over the past three quarters, interest costs have been rising sharply, and putting pressure on corporate performance. This increasingly heavy burden is noticeable, in fact, from the second quarter of FY06, when interest costs grew 12% y-o-y from just around 6% the previous quarter. Since then, this component has been on a sustained incline. Employee expenses, too, have started moving up again, on a quarter-on-quarter basis.
The point essentially is that with overall sales growing at a modest 13.5%, net profits have gone up 20.5% and operating profits too have risen higher than sales. With other income up substantially, are companies making a bulk of their money from non-core operations? Say, from trading and investments? And are they waiting for later quarters to account for the bulk of the expenditure? Some CEOs certainly think so, given that the benchmark they all watch so keenly these days, the 30-share BSE Sensex, rose a hefty 2,547 points?or 14.7%?in October alone. As some CEOs confide, at a time when the Sensex is rapidly rising?and threatening to slump at the slightest hint of bad numbers from bellwether companies?the pressure to play to the market with good quarterly numbers is enormous. No one, they admit, wants to be in a gathering where the others have fared better.
There are many who also argue that an overall slowdown is not likely, given that the Indian economy is now firing on multiple cylinders. In a recent interview with this paper, ICICI Bank?s managing director and CEO KV Kamath admitted that a slowdown is a reality in some sectors, but will be compensated for by a scaling up of the other engines of growth, hence keeping the overall momentum going. But what companies and their CEOs will need to watch out for, is the long-term consequences on shareholder value of succumbing to the temptation of holding a few spiffy quarters aloft. After all, shareholder value is about wholesome gains, not a quarter-to-quarter quest.