hey friends
i came across this article in business world, called A PROMISING OUTLOOK, good on. so enjoy ..
Corporate India’s results for the first quarter of FY07 have been a pleasant surprise. Higher fuel and power costs, together with increased raw material prices and rising interest rates were expected to slow down earnings growth. That has not happened. In fact, the comparatively tepid expectations for the first quarter actually proved to be a source of strength for the markets, as the spate of positive earnings propelled the Sensex upwards.
Earnings growth of the companies that comprise the Sensex has been 24 per cent year-on-year. This is the result of robust topline growth as well as an improvement in margins. Topline growth during the quarter for these companies was 31 per cent. Net margins, too, have improved. Even more encouraging is the fact that the improvement in the results holds true for the broader corporate universe as well. For the companies that make up the BSE 500, net sales increased by 29 per cent while growth in net profit was at 22 per cent.
What have been the drivers of this extraordinary growth? The strength of consumption demand was very evident during the quarter, the increase in cement demand being an obvious indicator of the continuing boom in housing. FMCG companies have seen decent volume growth in the high single digits and the return of some pricing power is reflected in the sector’s steady margins. The automobile sector too has proved resilient, in spite of early earnings disappointments by Hero Honda and Bajaj Auto. Quite clearly, the rise in interest rates did not impact the strength of consumption demand during the quarter, which was robust enough to offset the effect of higher input costs. Also, India Inc. has become far more efficient and dependence on debt is much lower. As a consequence, the direct impact of higher interest costs on the bottom line is much lower than earlier. Even in the banking sector, banks with a high proportion of low-cost deposits have been able to show an increase in their net interest margins. Domestic demand was complemented by strong export growth, seen in the good performance of the IT and textile sectors. The rupee depreciation over the period was also of considerable help.
Other trends that helped corporate India were the lack of capacity addition in sectors such as cement, which has pushed up prices, and higher commodity prices in the non-ferrous metals sector. A surge of M&A activity has also helped to boost revenues and bottom lines.
The other great driver has been investment demand. This is seen not only from the excellent performance of the engineering companies, but also from the big additions to their bulging order books. Companies have announced a plethora of expansion projects and it does look as if we are in the early stages of the investment cycle. With return on capital employed being much higher than the cost of capital, rising interest rates are unlikely to affect investment demand. Of course, many corporates have gone on a borrowing spree abroad and a falling rupee, with more borrowing and higher interest rates will, in time, adversely impact companies’ debt-equity ratios.
But what of the future? Will the rise in interest rates start biting and slow demand, as seems to be happening in the US? Will the deceleration of US growth and possibly of Chinese growth as well, hurt exports and lead to lower commodity prices? There is little doubt that the rise in interest rates will have a cooling effect on retail lending, although the extent of that is debatable. As a matter of fact, a cooling off in some sectors like real estate is desirable and will nip any bubble in the bud. The same holds true for personal loans.
But the data does not indicate any slowdown in the demand for automobiles. The numbers for July show robust growth in the number of two-wheelers and cars being sold. Nor has there been a dip in the record offtake of non-food credit. In short, even though higher interest rates could impact consumer demand, that effect is likely to be more than offset by the growth in investment demand. In the longer-term, the announcement of mega expansion plans by corporates in the retailing sector, and the huge resources that are planned to be poured into SEZs could lead to the current boom being an extended one.
Moreover, with the US Fed having hit the pause button on interest rates, some analysts argue that the RBI, too, will follow suit. The Indian economy is more insulated from external factors than the export-led economies of East and South-east Asia and lower global growth will not affect it greatly. On the other hand, if oil prices cool as a result, that will be decidedly positive. In short, the first quarter results show that the outlook for corporate India remains very promising.
finance forum
posted by libafinanceforum @ 6:20 AM
1 comments
