Can India Inc play those numbers again?

Sound quarterly results from some leading companies have cheered the Indian market, but worries over interest rates and problems in the US cloud the mood of corporates, reports Vyas Mohan.

The past looks good. The future is a bit tense, though.

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India Inc has once again managed to wade through unclear waters of a sluggish, struggling global economy to notch up healthy numbers for the last quarter and the financial year that closed in March. Though there has been some slowdown in profit growth, it has not been to the extent analysts and investors have been worrying about.

Acknowledging the feat, the 30-share benchmark index of the Bombay Stock Exchange has gained about 10 per cent since April 1, when the results season kicked off and revisited the psychological threshold of 17,000 in the process.

"There have not been any massive negatives in fourth quarter corporate results as was widely expected. And that is a positive," said Andrew Holland, managing director of Merrill Lynch for India.

With the sub-prime loan crisis that broke out in the US in May 2007 has hit profits and outlooks all around, a substantial blip was also expected in the profits of Indian companies. Consequently, a clutch of brokerages had downgraded the result expectations of mostly export-dependent companies, especially those in the information technology and pharmaceutical sectors.

"Expectations of a slowdown in the US triggered a sharp market correction in fourth quarter of financial year 2008. This was aggravated by concerns of a possible slowdown in the domestic market too," went a report of a leading domestic brokerage firm.

However, the companies that were expected to take the biggest hit from a US slowdown, surprised the Street by reporting strong fourth quarter numbers.

"Technology, telecommunications and pharmaceutical companies have beaten Street expectations, which is a good sign," said Holland.

With US financial giants trimming down operations following huge sub-prime losses resulting in a negative outlook for IT and IT-enabled service companies that derive more than 70 per cent of their revenues from the US, an already huge subscriber base was expected to caused a shrinkage in telecom companies' revenue growth as well.

With Infosys posting a 20.4 per cent growth in revenues year-on-year and the country’s largest cellular operator, Bharti Airtel, recording an impressive 45 per cent growth in revenues for the fourth quarter ended March 2008, the fears proved to be unfounded.

Markets cheered the results with shares of Infosys gaining 6.2 per cent on the day it announced results, while the Sensex gained 2.1 per cent or 346 points the same day.

However, some market experts feel that it is too early to rule out a slowdown in Indian corporate profits.

"The results have not been disastrous as people feared them to be. To that extent, it has been positive. However, it is too early to predict as many companies are yet to come out with their full-year numbers," said Jayesh Shroff, fund manager of SBI Mutual Fund. Further, "investors will need to watch for off balance sheet losses that have not yet been disclosed," said Morgan Stanley in a recent report. Some companies have been hit by hedging losses in derivatives related to foreign exchange.

Though companies in the business of information technology and enabled services segment along with those in telecommunications have managed to overcome adverse economic conditions, commodity-dependent businesses are feeling the heat. While higher commodity prices have pushed up cost of production for companies in the manufacturing segment, a stiffer interest rate regime has seen a clear slowdown in sales growth.

As a result, the country's top car maker in terms of sales, Maruti Suzuki India, recorded a 33.63 per cent fall in net profit growth to Rs 297.68 crore, as compared to the fourth quarter last year.

"Factors such as increasing input costs and greater volatility in foreign currency exchange rates coupled with lack of traction in volumes have been areas of concern (in the automobile sector). We have factored in an average four per cent decline in the earnings of major auto companies in financial 2009 to allow for higher input costs, steel in particular," brokerage house Motilal Oswal said in its recent India Strategy Report.

Though a stiffer interest rate regime and spiraling commodity prices may stifle corporate profit growth to a greater extent in 2008/09, the rate of growth would still be healthy, say market experts.

"Economic growth may slowdown to 7 to 8 per cent. But then, that is a good enough number. We are still talking of an earnings per share (EPS) growth of about 15 to 20. At current levels, this looks like market where there is valuation comfort," said Prateek Agarwal, head of equity of Bharti Axa Investment Managers.

Still, fears hound this market largely due to global economic uncertainties. But once the equity markets find some stability, the risk-appetite will return and the share prices could claw back to their peaks they were on during early January 2008, market analysts say.

However, much would depend on the Reserve Bank of India's interest rate policy. Should further hikes that may follow succeed in bringing down commodity prices and inflation in turn, market participants would for sure become a happier lot.

In yet another move aimed at taming a record-high rate of inflation, the RBI had recently hiked the cash reserve ratio of banks by 50 basis points (in two stages) to 8 per cent. The central bank is meeting on Tuesday to decide on interest rates and markets are eagerly looking forward to the signals that could show where corporate profits might go in the new financial year.