India Inc. has a cold and it shows in the financial results for the July-September quarter. Aggregate net profit (for the 485 companies that had declared results till October 28) is up by 16 per cent, the lowest growth in the past nine quarters. This figure (16 per cent) is also lower than the growth in aggregate revenues (21.6 per cent), again for the first time in nine quarters. Finally, the aggregate net profit margin for the companies has decreased from 9.32 per cent in the July-September quarter of 2003 to 8.88 per cent in the July-September quarter of 2004. More worryingly, the aggregate operating profit margin has declined from 24.3 per cent to 22.1 per cent. As the trendlines show, the momentum definitely points to the South.

Should we-that term encompasses anyone with an interest in corporate performance, CEOs, other executives, analysts, brokers, investors, economists and assorted busybodies-be worried? That depends on the reasons behind India Inc.'s performance.

The main reason, spiralling commodity prices, is evident in the results of companies in this business. Gujarat Ambuja Cements, for instance, grew its revenues for the July-September quarter by 59 per cent as compared to 1 per cent in the same quarter last year. That trend, says Anil Singhvi, Executive Director, Gujarat Ambuja Cement, will continue (he dismisses the recent fall in cement prices as an aberration that will soon correct itself). "Demand in October has grown by 15 per cent (year-on-year)," he adds.

That, growing demand, is the silver lining for companies in downstream industries that have been affected by an increase in commodity prices. "With the underlying demand still there, companies have been able to partially pass on the higher costs," says Jamshed Desai, Head of Research, IL&Fs Investsmart. The result? Slimmer profit margins.

Then, there is the oil effect. Although the government's effort at administering oil prices has helped, most companies are feeling the heat. "The paints industry has been affected by the increase in the price of crude oil," says Ashwin Dani, Vice Chairman and Managing Director, Asian Paints. "Margins have been under pressure for some time." The government's approach has meant different things for different companies in the oil business itself. "Normally, when oil prices go up sharply, refining margins shrink," explains Tridib Pathak, CIO, Chola Mutual Fund. "However, because of the high demand this time, the prices of (downstream) products has grown faster than that of crude; so, refining margins have gone up drastically."

That explains why pure refining companies such as Chennai Petroleum (its net for the quarter has increased by 174 per cent) have benefited while marketing companies such as Bharat Petroleum (its net profit has dipped by 54 per cent) are feeling the pain.

Finally, the base effect (read: their own superior performance in past quarters) seems to have caught up with companies, with only the software services companies displaying gravity-defying abilities. "There is a good business momentum across our businesses and we are confident on our long term prospects," says Suresh Senapathy, Corporate VP (Finance), Wipro.

All three reasons-the base effect, increasing input cost, and spiralling oil prices-are beyond the control of companies, although smart ones can mitigate the impact through effective hedging strategies. A linear trend line analysis of aggregate sales and profit after tax indicates that India Inc. is likely to grow both, although far slower than it did in the past nine quarters. With their operations as efficient as they are ever likely to be, India Inc. can rest easy for now. It only remains to be seen whether companies can cope with the not-now-but-definitely-coming hike in interest rates.

-By Narendra Nathan

SECOND
The Bigger, The Better
The gap between the men and the boys in the software industry grows.

Bigger is definitely better in the Indian software services domain. Heavyweights such as Infosys, Wipro and TCS have grown their sales (sequentially, and for the quarter ended September) by between 12 per cent and 14 per cent; the others haven't fared as well. Mumbai-based Mastek has seen no growth at all; Mphasis-bfl has grown by 10 per cent, but largely on the strength of an acquisition (Kshema Technologies) and increased activity in its business process outsourcing business; HCL Technologies has grown its revenues by 6 per cent and Patni by less than 3 per cent; and the Aditya Birla Group's PSI Data Systems actually saw its revenues decline 3 per cent. Even in terms of year-on-year growth (see Tier-I Vs The Rest), Indian software's first tier has performed far better than the rest: a growth in revenues of anything between 40 per cent and 52 per cent. "The market for offshore it services has been completely taken over by the top-tier," says Upinder Zutshi, coo, Infinite Computer Solutions, an unlisted Rs 330-crore company based in the us and India. "The only way to survive is to adopt completely different strategies." "Clients prefer to work with large companies that have the capability to offer end-to-end solutions," adds Kris Gopalakrishnan, coo and Deputy Managing Director, Infosys Technologies. While some companies are trying out the "different strategies" Zutshi mentions-Mphasis, for instance, is trying to offer integrated BPO plus it services-others are hopeful that the future will be better. "The recovery of the it sector has not happened in full," says Ashank Desai, Chairman, Mastek. "Demand is just starting to pick up and the larger companies have ended up bagging the big projects, but I expect the pie to grow over time."

That it could, although it is increasingly becoming evident that Indian software's first and second tiers are no longer operating in the same market. "My personal view is that the story is not over for tier-II companies," says K.R. Laxminarayana, Corporate Treasurer, Wipro. "They are not really competing in the same market and many have special offerings that will see continuing demand." But with biggies Infosys, Wipro and TCS eyeing even profitable niches, no business model is safe.

-Priya Srinivasan

BRIC Redux

Goldman Sachs' Roopa Purushothaman: BRIC-a-brac collector

A year ago Roopa Purushothaman, associate Global Economist, Goldman Sachs, co-authored a paper on how the world might change if the BRIC (Brazil, Russia, India and China) economies continued to grow. Now, in Global Economics Paper No. 118, Purushothaman explores what these projections would mean to world growth in general and three markets, crude, cars and capital, in particular. Roshni Jayakar speaks to the London-based economist.

You have revisited the original report after a year. Are you comfortable with the original projections?

Yes. The BRICs projections are our best guess about long-term trends, given the basic building blocks for the economy.

Why did you take just three markets to gauge the opportunities associated with the BRIC dream?

We took three important areas of market development-commodities, consumer durables and capital markets-to illustrate an approach that could be used to look at the market impact, stemming from our original projections. Within these broad areas, we focussed on signature sectors.

So, how do the BRIC countries impact the global markets in these three areas?

They could see their largest impact on commodity markets first, followed by consumer durables markets and finally, on global capital markets. India's peak occurs later than the other countries. Broadly speaking, Russia is a 'sleeper' story for consumer spending, while China is the dominant force for commodities now. India could move into similar roles in about 10-15 years if growth continues.

Is the Indian growth story a long-term one?

Two main factors underlie India's sustained growth potential: the scope for it to catch up with developed economies and its very favourable demographics. These factors are, of course, not new, and India bulls have been disappointed in the past. Raising productivity has everything to do with strengthening the conditions for growth we laid out in our first paper: maintaining stable macro policy, strengthening political institutions, and increasing education levels and openness.

Limited Progress
Still, the UPA government has more to show on the FDI front than critics thought possible.

Consider this: the United Progressive Alliance (UPA) government has managed to hike the ceiling on foreign direct investment (FID) in domestic airlines from the existing 40 per cent to 49 per cent, managed to allow a marginal increase in the FDI ceiling in private banks to 30 per cent, and is working hard to allay the fears of the communist parties (the Left) regarding foreign investment in telecom. Doing the same in insurance is still a no-no; then, who would have thought all this possible (also see Left In The Lurch, on page 40). Indeed, the sectoral ceilings have changed enough to warrant a new primer (this item).
Suitably enough, FDI has been pouring in. In the first four months of this year (April-July), as much as $1.44 billion (Rs 6,624 crore) has flown into the country, nearly 169 per cent more than the corresponding FDI last year. The India story, it would seem, is still alive and kicking.

-Ashish Gupta