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Boom time ahead for India Inc
B G Shirsat & Kishor Kadam in Mumbai | April 10, 2004 11:09 IST
Corporate bottom lines are expected to rise in the next few quarters as rural demand surges on the back of a good monsoon and rising commodity prices.
The improvement in the world economy, which has led to higher export growth during the last fiscal, and the increase in outsourcing of business processes to India -- both in the manufacturing and the service sectors -- will also contribute to this surge.
These broad themes have already been reflected in industry bottom lines. For instance, the steel industry, including the manufacturers of hot-rolled, cold-rolled, and galvanised plates, has seen an average net profit growth of 50.98 per cent in the third quarter of 2003-04, while sales increased 30.14 per cent.
However, growth in the third quarter is lower than the spectacular 95.71 per cent in the second quarter, an indication that the rise in raw material prices may have an effect.
Although the raw material prices in the fourth quarter have been higher, government intervention has restrained steel companies from increasing prices and this could affect profit growth.
The aluminium industry too shows a similar trend, with net profits rising 17.59 per cent in the third quarter, compared to 29.62 per cent in the preceding quarter.
The non-ferrous metals industry has seen a 153.47 per cent rise in net profits, even higher than the 86.28 per cent notched up in the second quarter. China's insatiable demand for commodities has been responsible for this boom.
The commodities boom has also led to shipping companies posting phenomenal results. Net profits of shipping companies increased by a huge 168.27 per cent in the third quarter, while revenues increased 68.56 per cent. This spectacular performance is expected to be repeated in the fourth quarter, given the world-wide rise in freight rates.
The automobile industry too has been riding a wave of demand, fuelled by the drop in interest rates and aggressive growth in retail credit. The two- and three-wheeler industry has seen its net profits increase 28.50 per cent in the third quarter, while revenues increased 11.32 per cent.
The biggest beneficiary of the infrastructure boom and the new anti-pollution norms has been the commercial vehicles industry, which saw its net profits rise by a whopping 124.54 per cent in the third quarter, while revenues rose 49.28 per cent on the back of strong volume growth.
This industry may, however, see a slowdown from the very high growth rates notched up so far, as higher input prices could affect the bottom line. Together with the auto sector, auto ancillaries have posted a high growth.
Supplies to global majors have helped this sector. For instance, auto ancillaries (engine parts) saw their revenues rise by 31.92 per cent in the third quarter, while net profits grew by 31.21 per cent.
One of the most heartening signs of the upturn in the business cycle is the strong growth recorded by engineering companies. Although net profits of engineering companies rose by 44.72 per cent, the rate of growth was lower than the 74.6 per cent posted in the second quarter and the 73.94 per cent growth in the first quarter.
The robust export growth is reflected in the performance of the diamonds and jewellery industry, which saw net profits rise by 53.25 per cent and revenues by a staggering 227.61 per cent in the third quarter. Good monsoons had a favourable impact on the fortunes of the tractor industry, which saw its net profits rise by 147.41 per cent in the third quarter.
Information technology companies did fairly well in the third quarter despite the rising rupee, perhaps due to the easing of pressure on billing rates.
Sectors that failed to impress in the third quarter include cement (net profits declined by 12.6 per cent), fertilisers, (net profits down by 19.99 per cent), inorganic chemicals (profits lower by 15.32 per cent) and tyres (profits down 30.61 per cent).
The domestic appliances, pharmaceuticals and paint industries recorded relatively tepid rates of growth.
Analysts expect the software industry to show volume growth of around 10 per cent in March 2004 quarter over the December 2003 quarter.
The strong volume growth will be on the back of incremental billing rates for large companies. The rupee appreciation poses no immediate threat to tech companies, as most of them remain fully covered on their net dollar exposures, analysts feel.
However, appreciation of the rupee against most major currencies in the fourth quarter of 2003-04 is likely to have an adverse impact on several Indian software companies. The main impact will be on account of translation losses due to the sharp appreciation in the rupee against most currencies in the last few days of the quarter.
Infosys was expected to provide an EPS guidance of Rs 220 for 2004-05. Wipro will expand margins due to better performance on the IT services business. Satyam will continue its strong volume performance led by the package implementation business.
The Indian two-wheeler industry has shown a strong recovery in the first half of 2003-04. This is expected to continue in fiscal 2004-05 on increasing affordability, improved credit availability, replacement demand and new launches. Leading players grew 11.3 per cent in 2003-04 on account of improved consumer sentiment.
The key beneficiary was Hero Honda, which experienced a 23.4 per cent growth, while both Bajaj and TVS faltered.
The passenger vehicle industry is poised for a sustained growth over the next 3-5 years. There is a rapid growth in demand as a higher proportion of the population is able to afford cars.
At present, the Indian cement market is oversupplied by over 20 per cent. The oversupply is largely in the southern and western regions. The northern and eastern regions, although still with a surplus, are relatively better off.
The surplus position in the Indian market has resulted in the cement prices across regions witnessing movement within a band, with no appreciable increase in any region.
Profit margins of cement firms are under pressure over the last few years following rise in external costs such as freight costs and energy costs, which account for bulk of the manufacturing costs.The aluminium sector is likely to do well in the next two years on an apparent shortfall of the metal, primarily driven by the shortage of alumina.