Understanding India Incs Performance

Updated: Nov 8 2003, 05:30am hrs
The mood is upbeat. The booming bourses mirror optimism as the Sensex has crossed the 5000 mark. The expectation is that even profit booking by FIIs may not hold back the rally for too long. India Incs latest quarter ending September 2003 results reinforce the exuberance (hopefully not irrational this time round). Net profits of about 1,200 major companies have gone up by 32 per cent during the quarter.

While this is impressive, it is subject to a caveat. Much of the growth has come from a 21 per cent contraction in interest costs, and other income, up 49 per cent, a result of mostly hedging and treasury operations.

Barring automobile, auto ancillaries, steel and oil refineries to an extent, it is unclear if companies have been able to improve productivity and realise economies of scale to improve operating and net profit. This is because operating expenses have marginally exceeded sales income growth of 11.3 per cent. There is a danger of virtual being mistaken for the real.

The simple reason is that India Inc has not taken advantage of low import costs made possible by an appreciating rupee. Not much by way of expansion or modernisation of productive capacities is taking place.

In any case, most sectors as well as major companies have done well. While the commodity producing sectors show some variations in their sales and bottomlines, automobiles and auto ancillaries have benefited from a surge in demand from the growing middle class and from the prospects of a better offtake from the farm sector. Bullish steel prices have put a new shine on steel companies bottomline. Cement companies have also steadied their show. Unlike in the past few quarters where IT companies were under pressure on their billings, this time round, IT companies have shored up sales.

But sadly, oil refineries have not been able to do much in view of uncertainty on fuel pricing. Their expectation of a price parity has come a cropper. And that has affected their bottomline this quarter. HPCL typifies this syndrome. Oil refineries did well in the previous quarter thanks mainly to inventory gains and better margins.

The moderate sales growth of 1,200 companies in the latest quarter bears the impact of sluggish growth of revenue of oil refineries as these account for about 35 per cent of total revenue of the sample companies.