Raha's ONGC reported a record net profit of more than Rs 10,000 crore last fiscal Subir Raha, Chairman & MD, ONGC

If 2002-03 was a dream run for India Inc-profits of 2,600 companies compiled by BT spurted 54 per cent over the previous year-the current year appears to have got off to a flying start. For the first quarter, profits of 330 companies (that's the current sample size based on results that came in at the time of writing) were up 48 per cent. And there's little reason why the heady growth of last year can't be repeated. After all, that impressive performance was clocked despite poor monsoons. The rain gods this time round have so far been more than kind, and that should help corporate India sustain the profitable trend right through the year. ''The focus of India Inc. has changed from sales growth to profit growth. In fact, companies are giving up sales that are unprofitable,'' says N. Prasad, Chief Investment Officer, Sundaram Mutual Fund.

The sample size for the first quarter may not be exhaustive, but it confirms what Prasad is saying: Sales are up 13 per cent. What's contributed to the chunky profits is the control on depreciation costs (up just 6 per cent) and interest costs (down by 2 per cent). To get a clearer picture (and also to make sure that the overall trend is not affected by a few big companies in the sample), we have generated an advance-decline ratio (See Gainers Galore). This is arrived at by dividing the number of companies that have advanced by those that have declined. For instance, the number of companies whose sales has grown is 2.12 times the number of companies that have witnessed a decline.

Initial trends suggest that most sectors-including it services-have improved on their performance in the first quarter of 2003-04 in comparison with the previous year's corresponding quarter. Good results coupled with the good monsoons are also doing wonders to business optimism with various indices capturing the feel-good factor. For example, the CII Business Confidence Index for April-September 2003 is placed at 61.6 point. A score of above 50 indicates positive confidence while a score of above 75 would indicate strong positive confidence. The Dun & Bradstreet Business Optimism Index for India for the July-September 2003 period has also improved to 126.5 from 119 during the previous quarter.

"Ranbaxy's numerous growth engines will enable us to maintain balanced growth" D.S. Brar, CEO & MD, Ranbaxy laboratories

There are other subtle ways (mostly used by the stockmarket) to gauge the improvement in business confidence. Consider the corporate tax paid out in the first quarter. As this payout is based on the estimated profit for the entire year, a surge in this figure would indicate that companies are expecting a good year ahead. And that's exactly what's on the cards, with the corporate tax payout increasing by 16 per cent last quarter. Also take a look at dividend payouts, which managements make based on future growth expectations. Here too, the confidence is clearly visible: Some 394 companies (out of the 769 that have declared dividend so far) increased the dividend payout last year that only 163 have decreased it. And it is this expected future growth story that is driving the stockmarket for now. For example, the BSE benchmark Sensex, has rallied by more than 800 points (27 per cent) over the past three months (from April 25 to July 25).

A Reality Check

But before we get carried away with blossoming bottomlines and rocketing indices, let's do a reality check. For, it isn't as if all the factors contributing to the heady profit growth are sustainable in the long term. Some are, some won't be. As Atul Sobti, Senior Vice President (Marketing & Sales), Hero Honda, points out: ''It would be incorrect to make a blanket statement that India Inc. has come into its own.''

One area in which prudence scores over euphoria is with regard to the base effect. Several companies have been able to show phenomenal growth simply because of the lower base of the previous year. Consider Dena Bank, whose profits soared 905 per cent last year only because 2001-02's profit was minuscule. The net profit growth over a three-year time frame paints a more realistic picture: a growth of 22 per cent per annum. Similarly, consider Maruti's performance in the first quarter-a 971 per cent growth in net profits! ''Frankly, last year's first quarter was not very good and that is one reason for this stupendous growth,'' says Jagdish Khattar, Managing Director, Maruti Udyog.

But for every company that's showing profitable growth thanks to the base effect, there will be at least two others that are growing spectacularly thanks to a number of efficiency-related factors coupled with improved prospects for that particular industry. Consider, for instance, Tata Steel, which recorded an impressive 267 per cent spurt in profits for the first quarter. Managing Director B. Muthuraman outlines four reasons for the growth. ''First, we have improved our product mix (the proportion of cold rolled coils and galvanised materials has gone up). Second, our sales to the auto sector, from where much of the demand is coming (along with appliances and construction), have gone up. Third, steel prices have risen. And fourth, there has been an 8 per cent growth in demand over the previous quarter.''

The consolidation in the commodities sector (metals, petrochemicals, etc), in the meantime, has also done its bit for the great Indian corporate revival. If operating profit margins are heading northward (see Getting Back Into Shape), it's largely because the demand-supply imbalance that existed previously has got drastically corrected, with several of the smaller players shutting shop. ''What's benefited Indian players is the shakeout that's happened in the international markets. With India boasting several of the lowest-cost producers in various industries, it naturally gets a huge advantage,'' says Deven Choksey, Managing Director, KRC Research.

"There has been an 8 per cent growth in demand over the previous quarter" B. Muthuraman, Managing Director, Tata steel

Exports Thrust

What's more, many metal companies are using the opportunity of increased global demand to explore new export markets. Jindal Strips, for instance, till five years back had nil exports. ''Today, our exports are growing at a compounded annual rate of 200 per cent. This year's target is $175 million (Rs 805 crore) of exports, up from $135 million (Rs 621 crore) last year,'' says Arvind Parakh, Director, Finance, Jindal Strips.

Parakh makes the point that exports give his company a splendid growth opportunity even when domestic markets are flat or sluggish. And no company illustrates that phenomenon better than Ranbaxy. As D.S. Brar, CEO & Managing Director, Ranbaxy Laboratories, puts it: ''Ranbaxy has a number of growth engines in place especially, the US and the EU markets, which will enable us to maintain balanced growth.''

Along with improved demand conditions, much of India Inc has spent much of the recessionary years honing its internal efficiencies, as a result of which many of them are well-oiled growth engines today. Ranbaxy, for instance, recently reorganised its marketing and sales teams to reflect better alignment of products and field deployment with the therapeutic area concept. The objective: to bring synergies in the marketing effort.

Then, Tata Engineering (recently rechristened Tata Motors), by streamlining the supply chain, has been able to reduce inventory levels and consequently bring down working capital into negative territory. ''It is a major achievement for a capital-intensive company like Telco to have a negative working capital,'' avers Prasad of Sundaram Mutual.

Another way manufacturing companies are reducing costs is by stepping up the pace in outsourcing. Maruti is one automobile company that's taking this path. ''It has been our constant effort to reduce cost by increasing the outsourcing,'' says Khattar.

"We plan to launch a slew of models based on new platforms" Venu Srinivasan, Chairman & Md, TVS Motor Company

A major ghost that India Inc. is beginning to exorcise is poor employee efficiency. The improvement may be small, but what is notable is that a beginning has been made. Thanks to rightsizing initiatives, employee cost as a percentage of sales has been coming down over the recent quarters (see Getting Back Into Shape). ''The fact that our sales have increased from Rs 480 crore in 2001-02 to Rs 700 crore in 2002-03 with the same staff strength shows that we have increased our operational productivity substantially,'' explains Amit Kalyani, Vice President & Chief Technology Officer, Bharat Forge.

What's also helped companies reduce their overall cost structure and contributed to the healthy bottom lines is the steady fall in interest rates over the years. ''Now the cost of finance in India is more or less comparable with global standards,'' says Choksey of KRC Research.

The biggest beneficiaries of this interest rate fall are the banks. For example, several banks figure in the list of best performers largely because of the huge treasury income reported by them during the year. ''These treasury profits are of one time in nature and can't be sustained in long term,'' cautions Mahesh Vyas, CEO, Centre For Monitoring Indian Economy. Most of this income originated only because of the fall in the yield of government of India bonds (now placed around 5.70 per cent) and with it a corresponding rally in its prices. A further fall looks unlikely. So these banks can't expect huge treasury incomes. But, as Rajeev Thakkar, Head of Research, Parag Parikh Financial Advisory Services, points out: ''They are still holding on to huge unbooked profits, and this component will remain high at least for the current year.''

As in the case of banks, there are many other sectors out there that can't afford to take the good times for granted. The efforts at cost reduction, value engineering, increasing production, and storming the market with new products will have to continue. That's exactly what Venu Srinivasan, Chairman & Managing Director, TVS Motor Company, plans to do. He acknowledges that the current ''good buoyancy can't last year after year''. That's why he plans to ''launch a slew of models based on new platforms''. ''We need a burst of at least eight-to-ten models and three-to-four platforms,'' he declares.

Clearly, there's little doubt that the current period is one of the best India Inc. has enjoyed in the 12 years post-liberalisation. But there's little time for Indian companies to rest on their oars. The good times have only just begun to roll.

with additional inputs from Swati Prasad