Corporate India looks to be heading for its fourth consecutive drop in quarterly net profit as companies battle cheap imports and delay investments to expand capacity due to high interest rates.
This prolonged slump would make it tougher for Prime Minister Narendra Modi’s government to hold to its plan to accelerate economic growth to over 8 percent in the fiscal year ending March 2016, from 7.3 percent the previous year.
The collective net profit of 80 Indian companies, each with a market value of more than $100 million, fell 8 percent in the April-June quarter, year-on-year, according to Thomson Reuters data.
And the decline is expected to continue in the current quarter that runs to the end of September: analysts forecast net profit will fall 6 percent at these firms, which include mobile carrier Bharti Airtel, IT services exporter Infosys , and Tata Motors, according to the data.
Corporate India is expected to have to wait until the following quarter to see a pick-up – analysts forecast earnings will rise 8 percent in the three months to December, ending four quarters of falling profits.
But this will still be some way short of the double-digit growth seen early last year.
JSW Steel Ltd, India’s third-largest steelmaker, posted its first consolidated quarterly loss in seven quarters last month, hit by a sharp fall in steel prices and a flood of cheap imports of the alloy into the country.
“Margins are under pressure across the industry in spite of commodity prices coming down,” said Joint Managing Director Seshagiri Rao.
“Demand is not improving and there is this threat of imports, all these things together I think margins will be really under pressure even going forward,” he told Reuters. “There is definitely a case for (a) reduction in interest rate.”
India executives say the threat of cheaper imports of goods ranging from steel to electronics has risen significantly with the Chinese economy slowing down and global companies looking for new markets for their products.
“These (imports) are substantially at lower prices, aided by depreciation of yuan, depreciation of yen and depreciation of won relative to rupee. That is also a major pressure point for the prices to come down in India,” Rao said.
While a drop in the prices of the crude oil and some raw materials in recent months is a positive for many Indian corporates, the impact on earnings will be countered by sluggish demand, forcing companies to delay investments that would boost economic growth.
India’s central bank has reduced its policy rate by three-quarters of a percentage point, to 7.25 percent, since embarking on an easing cycle in January, but the benefits for the broader economy have been limited because of commercial banks’ reluctance to lower their lending rates.
R. Shankar Raman, chief financial officer of conglomerate Larsen & Toubro said the private sector was in “a very difficult situation”.
“We have a peculiar situation where, before the private sector comes to invest … the overall viability of the business should improve.”