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The Result of a Cautious Tread

The Q2FY09 results show that Indian companies have learnt a lot & have moved on from the crisis as well

The spectacular bull run which galloped for a good three to four years has come to a startling halt and it seems like it’s time for us to get back to the old drawing board. The Sensex, with its extended freefall, is back at the 4-digit levels and no matter what anyone says, there's a big lesson that everyone has learned this year. And as school continues, sitting in the front benches is India Inc. the results of the September 2008 quarter (Q2FY09) show that the Indian companies have not only learned a lot, but have moved ahead as well.

The result being — companies turning up with impressive numbers. The Indian companies that announced their results till October 26, 2008 have shown that they have the ability and sustainability required to fight back against these turbulent times. The combined income of 945 companies grew by 29.69 per cent and the net profits grew by 7.22 per cent for September 2008, as compared to the corresponding period of the previous year. These figures also show a marginal improvement from this year’s previous quarter, ended June 2008, wherein the income and net profits had increased by 27.62 per cent and 5.33 per cent respectively, over its corresponding period of 2007.

A rise in interest payments and a cut down on fat pay cheques shouldn't surprise anyone, as these are the first and one of many strategies used by the companies to insulate themselves from the downturn. Salaries and wages expressed as percentage of total income stood at 8.08 per cent and interest expenses at 11 per cent for the September 2008 quarter. These figures for the June 2008 quarter were 8.62 per cent and 10.73 per cent for salaries & wages and interest expenses, respectively. This clearly signals the mounting pressure on India Inc. to cut cost and the extent to which their income is sandwiched between rising material cost and interest payments.

However, the companies were weighed down by a sharp rise in input costs and with limited ability to pass on the burden to customers, India Inc.'s operating margins took a knock in the second quarter of 2008-09 even though demand was buoyant. Operating margins have been on a continuous decline since June 2007 (see graph). For the September 2008 quarter, they stood at 10.98 per cent, as compared to 11.43 per cent in the June 2008 quarter.

Another interesting parameter to look at was the Debt Service Coverage Ratio (DSCR), which is the amount of cash flow available to meet annual interest and principal payments on debt. A DSCR of less than one would mean a negative cash flow. A DSCR of less than one, say 0.95 would mean that there is only enough net operating income to cover 95 percent of annual debt payments. The DSCR for the September 2008 quarter was at 0.52, compared to 0.50 in September 2007, and will continue to be under pressure as the monetary tightening done in the last 2-3 years take a lagged effect into the system. However, recently the Reserve Bank of India has cut the key short-term lending rates by 150 bps to 7.5 percent, but that will take time to percolate into the system and it may also turn out to be a case of something being too early to celebrate. This is the first time in five years that the RBI has cut the repo rate, the last being in August 2003 by 0.5 percentage point to six per cent.

Coming to the companies that registered declines, out of the 945 companies that had declared their results till October 26, 2008, 481 reported a decline in net profit and 226 in total income, as against the September 2007 quarter. As far as the individual results are concerned, there were a few surprises in every sector. In the banking space, the State Bank of India announced results much ahead of the street's expectations. SBI has posted a net profit of Rs 2,259.72 crore for the quarter, a growth of 40 per cent against 36 per cent in the same quarter a year ago. Its total income rose to Rs 17,909.64 crore in the second quarter from Rs 13,658.22 crore a year ago, an increase of 31 per cent. On the other hand, ICICI Bank reported flat growth of 1.1 per cent in net profit at Rs 1,014 crore for the quarter ended September 2008, largely due to lower non-interest income and sluggish growth in credit. As a whole, banking sector has sprung a surprise of sorts reporting a 26 per cent growth in their bottom lines in the second quarter of 2008-09, at a time when corporate India has seen its net profits shrink, banks, whose share prices have been hammered in recent weeks. This surprise jump can be accredited to the improvement in operating earnings with net interest income, the difference between interest earned and interest paid, growing 37.35 per cent.

In the two-wheeler space, Hero Honda bucked the market slowdown; the motorcycle major posted its highest net profit in five quarters with a 50 per cent increase in profit after tax at Rs 306.3 crore for the quarter ended September 2008. The jump can be attributed to higher motorcycle sales and rationalisation of input costs.

In the Information and Technology industry, the combined income of companies that form the part of BSE IT index (with the exception Financial Technologies) grew by 28.41 per cent, compared to the corresponding quarter of the previous year, the net profits grew by 20.38 per cent. The figure for the June quarter for income and sales were 24.23 per cent and 0.91 per cent, respectively. The sharp increase in the September 2008 quarter compared to the June quarter can be attributed to the rupee depreciation. Since April 2008, the rupee has depreciated by as much as 8.5 per cent against the greenback.

India's largest publicly-listed company —Reliance Industries, FY09 second quarter net profit grew by 7.4 per cent to Rs 4,122 crore, while revenue soared by about 40 per cent from the previous year. The total income rose to Rs 44,938 crore for the 3-months ended September 30, against Rs 32,211 crore in the year-ago period.

However, it seems like the realty pack will continue to remain in pain. All players in this sector are suffering from a 'real estate bubble burst; putting both the top-line and bottom-line under serious pressure as customer advances dry up, projects are being delayed and investors who booked in the projects are eager to exit by even selling at 25-30 per cent.

The combined profitability of the constituents of the BSE Realty Index (with the exception of Omaxe Ltd) grew by 22.10 per cent for the September 2008 quarter, when compared to the September 2007 quarter. Whereas, the income expanded by just 11.28 per cent for the similar time period. Change in the profit and sales figure for June 2008 quarter when compared to the corresponding quarter of the previous year were at 25 per cent and 22.56 per cent, respectively.

So, while the bad news for the real estate sector continues, the others are battling and trying to stay afloat against the US slowdown and dampening customer demands.