FE Editorial : Q2 query

Mon, Oct 19 09:16 AM

Some early corporate results for the quarter ended September show that India Inc is on a rebound as sales, and therefore toplines, are picking up on the back of a softer interest rate regime, adequate liquidity and buoyant consumer sentiments. Results of some private sector banks, which have taken the lead in reporting their financials early, show that the slow balance sheet growth and decline in net interest income were compensated by strong treasury gains and better cost control during the quarter. In the quarter ended September, banks continued to lower deposit rates, but kept lending rates unchanged. Banks are also reporting an uptick in credit disbursement and companies that have taken sanctions for credit are now making the disbursement. The positive momentum is expected to continue unless RBI increases interest rates in the forthcoming monetary policy. It should not, though. Analysis of advance tax paid by companies show sectors like consumer durables and auto, which are mainly credit-driven, have aided the recovery in corporate growth. But sectors like real estate and hospitality continue to remain laggard and would depend on the overall recovery of the economy. The benefits of operational efficiency drives taken up by companies and low commodity prices will play out in the numbers for the quarter. For IT companies, the upward revision of earnings guidance by bellwether Infosys Technologies underlines the fact that business fundamentals are improving and companies are reporting increasing sales queries. But, going ahead, the dampener for IT will be the appreciation of the rupee against the dollar and the impact will be higher on mid-sized companies, as they lack the bargaining power to revise contracts with large clients.

For auto companies, the 17% increase in domestic sales during the quarter ended September came as a huge boost, considering the fact that the sector was the worst-hit because of the economic slowdown. Low interest rates and consumer sentiments helped push up the topline of auto companies and the current signs of revival in the economy are pointing to an improvement in the movement of freight which will augur well for commercial vehicles where sales are recovering, but at a slower pace. Low interest rates are very crucial and will be the key determinant to see how the sector pans out in the next few quarters. For the cement industry, delayed monsoon has resulted in extended construction activities and incremental demand for cement. As cement consumption grew by 14% in the quarter, huge capacity additions would create oversupply and put pressure on pricing. Overall, as more large cap companies report their results in the weeks to follow, the direction of corporate earnings will emerge more clearly. It is likely to be positive.

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