A 4QFY12 earnings review

Tue, 5 Jun Pre-Open

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The earnings season for the fourth quarter of fiscal year 2012 has almost come to an end. And we must say that the end was disappointing. Approximately 3,000 odd companies that have declared their results so far have seen their profits decline. Higher interest rates, volatile commodity prices and weakening rupee have impacted the profitability of India Inc. The sales growth too came under the scanner during the quarter. It may be noted that for the first time in many quarters, the sales growth fell below 20%. The growth in the quarter that went by was only 13%.

Reduction in sales growth is the factor that's most concerning. It indicates that both demand and output are dwindling. Until now, sectors like power, infrastructure and engineering were bearing the brunt of the slowdown. But it seems that in this quarter, consumer oriented industries have also been affected. Be it passenger cars, white goods or garments. Poor volumes from these segments indicate pressure on consumer spending. And consumer spending being the largest part of the economy, there are clear signs that the economic growth rate is under pressure.

But we know that the volatility in consumer spend is a temporary phenomenon. It should pick up since it is mostly non-discretionary in nature. Thus, to sustain/improve growth, everything boils down to how the government manages the three critical risks faced by the economy. One is Inflation. Second is volatility in raw material prices. And third, is the currency risk arising from weakening rupee. Volatility in raw material prices can't be tamed as they are dependent upon global demand and supply. However, government must take steps to curb inflationary pressures and tumbling rupee. Concrete steps are also needed to improve the deteriorating investment climate in the country. This will allow capital flow into critical sectors and improve investor confidence.

Right now, majority of the sectors like infrastructure, power, engineering and real estate are suffering from liquidity issues. Procedural delays faced by investors in these sectors act as a hindrance for capital infusion. Basically, the fear of risking/losing capital is keeping investors at bay. Thus, unless the government takes concrete steps to improve business confidence, next few quarters will be equally difficult for India Inc.