India’s GDP may have grown at a brisk 7.5% (at constant prices) in Q3FY15, but corporate profits have fallen sharply; for a clutch of 2,217 companies (excluding banks, financial institutions and oil marketing companies) net profits have dipped 14% year-on-year in the three months to December.
The disconnect between the GDP and corporate performance has been especially large in Q3FY15, since profits grew fairly well in the September and June quarters, at 18.6% y-o-y and 38.3% y-o-y, respectively. One reason is that in the June quarter, companies benefitted enormously from the depreciation of the rupee — which had started falling in May 2013 — resulting in the top line growing by 11.22% even though companies reported sluggish volumes and weak realisations.
They also gained from falling raw material costs —down 70 basis points as a share of sales.
In the September quarter, the top line rose by just 3.7% y-o-y but the bottom line growth was helped by falling raw material costs — 114 basis points as a share of sales— lower interest costs — down 2% y-o-y — and a very small rise in depreciation of sub 4% y-o-y.
India Inc’s performance appears to be more in sync with factory output data which has been less than mediocre; IIP contracted 4.2% in October, rose 3.9% in November and rose again by 1.7% in December.
These numbers reflect the weak volumes in sectors such as automobiles—both commercial vehicles and passenger cars– consumer goods including durables and staples, cement, capital goods. GDP data for Q3FY15 showed manufacturing growing at 4.2% y-o-y—-CSO’s assumption for the full year is 6.8%. However, most manufacturing companies —Tata Steel, reliance Industries, BHEL, Coal India, Tata Motors, Larsen&Toubro, Bajaj Auto, turned in very ordinary performances in the three months to December.
The results are bad news to the government because tax payments have fallen 3% year-on-year. If the sample is expanded to include ONGC and the oil marketing companies, the fall in taxes could be steeper. Interestingly, the chairman of the National Statistical commission, Pronab Sen, believes that companies have under-estimated their advance taxes.
In July-September, the growth in gross fixed capital (GFC) was zero y-o-y, compared with the 10-year average of 9%. As a percentage of GDP, GFC has fallen by over 4% over the past five years. In an indication that companies are not yet ready to add capacity, State Bank of India(SBI) chairman, Arundhati Bhattacharya, observed last Friday, it could take a few more quarters for the demand for credit to pick up. Loans at the country’s largest lender are estimated to grow by just about 10% in the current year, Bhattacharya said. Typically, credit grows by about 1.5 times GDP but the pace has been far slower in FY15. In the fortnight to January 23, non-food credit rose by 11% y-o-y to an outstanding of Rs 63.94 lakh crore.
