The stock market may be at a new high this month, but there isn't much reason to cheer if the "early bird" financial results of companies are anything to go by. The net sales growth of 496 companies (excluding banks and non-banking finance companies, and the major oil refiners which are yet to announce their results) in the April-June quarter at 17.2 per cent is the lowest in the past five quarters.

The growth in operating profit and net profit too has been the lowest in the past five quarters. The slowdown began some months ago, for in the preceding (January-March) quarter, the same 496 companies had posted just 22 per cent growth in sales, after 31-33 per cent quarterly growth rates in the previous three quarters.

There has been increasing pressure on costs since the July-September 2006 quarter, but companies seem to have learnt how to cope with this. Thus, the ratio of total expenditure to sales has increased by only 70 basis points y-o-y in the April-June quarter, and hence the operating profit margin (excluding other income) has resulted in a similar decline. However, at 21 per cent, the operating profit margin is very good when compared with the 18.8 per cent achieved in the January-March 2007 quarter.

That may be the reason why the stock market is happy with the 28.4 per cent growth in net profit. Companies have managed raw materials costs better than before (these grew by only 5.6 per cent in Q1 of FY08, compared with 28.4 per cent a year ago). The rate of increase in employee costs too has come down to 22 per cent in Q1 FY08, compared with 33-40 per cent in the previous four quarters. As for net profit, the growth rate of 28.4 per cent in the April-June quarter was lower than the 34 per cent reported a year ago.

But it is significant that 'other income' has nearly doubled over Q1 FY07, as companies have reported foreign exchange gains on account of currency differences on their borrowings. Also, interest cost declined 10.5 per cent y-o-y, while the increase in depreciation and tax was lower at 6 per cent and 13.7 per cent, respectively.

Early bird results have a sector bias as technology, pharma, cement and capital goods companies are usually the first off the block and almost all these are doing well. Software companies have been affected adversely by the appreciating rupee and have posted significantly lower growth rates. The pharma sector has seen sales growth of just 9.4 per cent, which has resulted in lower profit growth. Cement and capital goods companies have done quite well, as was expected.

To put the numbers in perspective, a year ago the Sensex was at 10,617 points and now it is 15,768 points. The sales and net profit growth for the same set of companies last year was 31 per cent and 34 per cent, respectively. This April-June, in contrast, it is 17.2 per cent sales growth and 28.4 per cent net profit growth.

Though the operating profit margin has not disappointed, the growth in profit is assisted by 'other income', and the decline in interest, depreciation and tax. If sales growth goes down further, companies will not be able to post similar profit growth in the coming quarters. Meanwhile, on the stock market, momentum is being provided by liquidity.