Wipro's Chairman Azim Premji is forecasting a bright outlook in the quarters to come	With raw material prices stabilising, Hero Honda (Chairman B.M. Munjal above) could be in for high growth

Never mind a few nasty surprises here and there, India Inc. is on a roll for a second successive year. Buoyed by higher-spending average Joes and Jyotsnas in uptown as well as smaller-town India, a new-found courage for capital expenditure amongst corporates, and the still-vibrant it outsourcing story, Indian companies continue to have it good. For 12 months ended March 2005, aggregate sales, based on the first 1,528 companies to declare results, have gone up by 19.37 per cent compared to the previous year. Operating and net profits have zoomed by 13.93 and 28.74 per cent respectively. That's the good part. The even better news is that there's little reason why Corporate India can't keep the good show going through the current year too (albeit not at such a breakneck pace).

"Corporate earnings in 2005-06 should move up by 15-17 per cent," says S. Naganath, President & CIO, DSP Merrill Lynch Mutual Fund. Also of significance, according to Bharat Shah, CEO and Managing Partner at ask-Raymond James, a Mumbai-based brokerage, is that the quality of earnings is improving. For example, it is not just the reported profits that are growing, cash profits too are on the up, registering a growth rate of 23 per cent. More importantly, the profit at the net level is post-tax in the truest of senses-after providing full tax liability, including deferred tax liability.

Surf's Up

The shadow of high crude oil prices may be towering over India (and most of the world), but that isn't taking the sheen off India's bright-as-a-button growth story, which should endure for many more years. With a nominal GDP growth rate of 12-13 per cent (7 per cent real growth plus inflation of around 5-6 per cent), it is only natural to expect big corporates to show a higher growth rate of around 15-20 per cent. A reflection of the fast-growing economy is the quarter-on-quarter growth (see ...With Impressive Q-On-Q Numbers As Well...) the BT sample has been able to capture. Margins too are intact (although there has been margin pressure in select industries).

SECTORS EXPECTED TO DO WELL IN 2005-06...

ENG. & CAPITAL GOODS With the capex cycle gaining momentum, these companies can expect above average growth rates CONSTRUCTION FDI liberalisation coupled with a burst in construction and an infrastructure build-up augurs well AUTO & ANCILLIARIES Faster demand growth, coupled with stable steel prices, will result in higher-margin growth IT SERVICES The wave of outsourcing continues, and is expected to sustain TEXTILES The multi-fibre agreement is history, signalling boom times for this sector

...AND THE EXPECTED LAGGARDS A few sectors will disappoint because of a combination of factors including a higher base effect, huge commitments to capital expenditure and research and development, as well as high crude oil prices.

PHARMA With the big players increasing their R&D expenses, this sector will show lower earnings growth METALS Stabilising global prices coupled with the higher base effect will result in modest growth prospects OIL With the Centre failing to pass the price hike to Indian consumers, companies will have a tough time

The domestic consumption story is clearly reflected in sectors like fast-moving consumer goods (FMCG) and hotels. After years of subdued growth-and flat growth in case of industry beacon Hindustan Lever (HLL)-FMCG companies have bounced back smartly, with sales and net profits climbing 12 per cent and 35 per cent respectively (not accounting for HLL). What's more, with the dogfight between HLL and Procter & Gamble (P&G) in the detergents and hair care segments abating, both can now look forward to profitable growth. The hotels industry, for its part, is enjoying boom times, thanks to the inbound increase in domestic and international travellers (both tourists and for business). Such frenetic movement helped the hospitality sector register a revenue growth of 26 per cent and a spurt in the bottom line of 558 per cent. That number may appear mind-boggling, and it probably even is, but do remember that the growth is on the previous year's low base. So don't expect such eye-popping numbers in the current year too, although you can certainly look ahead to a smart set of numbers.

Contrary to apprehensions, the it outsourcing wave is showing little signs of ebbing, riding high on the cost differential between manpower costs in India and the developed world. The fancy for India as a back-end favourite is amply reflected in the growth figures for the IT services sector, which clocked a topline growth of 34 per cent and a post-tax profit surge of 44 per cent. Expect the party to continue in the coming year-a bit less riotous perhaps, but still a party nonetheless. "Though it may not be at the last year's levels, it will show much higher growth than the average," says Nilesh Shah, President, Kotak Asset Management Company.

Meantime, the capital expenditure cycle, which began stirring up early in the calendar year, is gaining momentum, thanks to firmer commodity prices and higher capacity utilisation. That explains why engineering and capital goods firms posted great numbers last year, with revenues shooting up by 23 per cent and profits by 43 per cent. With the investment boom unlikely to fizzle out in a hurry, and with billions being sunk into countless infrastructure projects, growth for these companies-and also those in related sectors like construction and cement-will doubtless sustain.

If you're one of those who prefer to take a quarter at a time, you can rest assured that the first quarter of 2005 (which ends on June 30) is going to be a bumper one. That's because virtually every smidgen of business data that's being let loose-company despatches and business confidence indices, to name just two-points to a higher level of activity than being currently witnessed.

The Flip Side

All in all, it's a pretty picture. Or is it? Expect a few dribbles of disappointment on an otherwise vivid canvas. The commodities sector, for instance, which has shown red-hot growth rates till March 2005-the base metals like steel, copper and zinc have shown a combined profit growth of 127 per cent-is unlikely to repeat such a sizzling showing in 2005-06 as well. One simple reason for that is the higher base it has reached. The other is the stabilisation of international prices for most of these commodities, especially in metals. "The growth in metals is now expected to come in the form of higher volume growth and not by further increase in prices," explains Mihir Vora, Head (Equities), ABN Amro Mutual Fund. What also threatens to pull down their earnings growth in the short- to mid-term is the higher capex commitments of such companies, which will result in higher interest and depreciation costs.

One sector that has been feeling margin pressure after a couple of years of go-go growth is automobiles. The auto sector (including components) has shown a net profit growth (21 per cent) that's lower than that of the revenue growth (22 per cent). But with the prices of metals (like steel, copper, etc.) stabilising, the good times may once again be round the corner, unless of course oil prices flare up even further.

Tata Steel's MD B. Muthuraman will have to rely on volume growth rather than price increases	R&D investments are resulting in short-term hiccups for Dr Reddy's Chairman Anji Reddy

The auto sector didn't disappoint, but four that did flatter to deceive are banking, pharmaceuticals, textile and oil. The operating income of the aggregate banking sector crawled upwards by 5 per cent, while net profit actually slipped a percentage point, mostly due to treasury losses. But with most of the banks booking full treasury losses, and with credit picking up, the sector is expected to fare much better in the current year. Likewise, pharmaceuticals didn't have too much to shout about, recording single-digit growth in revenues and profits. The sector was dragged down mainly by the disappointing performance of the big companies. "That's because of the higher investment for the future (in the form of higher R&D and export promotion expenses)," says Vora. That high-spending, lower-growth trend is expected to continue in the current year as well.

Another non-performer last year has been textiles, with net profits falling by 1 per cent (although revenues did inch up by 13 per cent). The probable culprits: uncertainty regarding implementation of vat, higher costs because of higher capex spending (which are being made to benefit from the scrapping of the multi-fibre agreement), and an appreciating rupee. But most of these dampeners-except for volatile forex rates-are behind the textiles companies, and the ongoing year should prove much better. The oil industry too is expected to be reined in by the higher crude prices, the government's reluctance to increase domestic prices and its new ruling that independent refineries should now bear the subsidy burden. Clearly, the direction in which oil prices are headed will determine the fortunes of not just the oil industry, but will also ascertain whether India Inc. as a whole can keep the growth engine humming smoothly in 2005-06 as well.