India Inc’s profits finally rise

Indian companies are posting their best earnings results since Prime Minister Narendra Modi swept to power two years ago, giving the clearest sign yet that India’s fast, but patchy, economic growth is beco-ming more broad-based.

Though GDP growth figures make India one of the world’s fastest growing economies, weak private investment and low capacity utilisation rates have painted a less rosy picture.

Going by India Inc’s surge in profit growth in the first three months of the year, however, the outlook really does seem to be brightening, as benefits feed through from lower interest rates and government spending in infra and defence.

On Tuesday, India will release gross domestic product data for the January-March quarter. Year-on-year growth of 7.5 percent is forecast by a Reuters survey economists, slightly faster than the previous quarter’s 7.3 per cent.

“Macro indicators are suggesting that at the ground level the economy is gaining momentum,” said Dhiraj Sachdev, a fund manager at HSBC Asset Management.

“That has also been validated in terms of better corporate earnings in many of the sectors.”

Operating profits for 289 companies that have reported results so far leapt 25.5 per cent year-on-year in the March quarter, compared with 1.7 per cent growth in the previous quarter, according to Thomson Reuters data. This is Indian firms’ best showing since the April-June quarter in 2014.

Put alongside the 6.8 per cent decline in earnings that data provider Factset reckons companies in the S&P 500 suffered during the same quarter, India’s corporates have some things going in their favour.

India’s National Stock Exchange share index has surged around 17 per cent from a near two-year low on February 29, outperforming a seven per cent gain by the Asia-Pacific MSCI index excluding Japan.

Sadly, corporate balance sheets remain stretched, making it hard to revive private investment, which has lagged for the past four years.

Yet, sectors tied to capital goods and infrastructure such as steel and cement are recovering. After five quarters of double-digit declines, operating profit in the materials sector rose 22 per cent in the March quarter. The cement and power sectors have also seen demand improve.

While factories are running nearly 30 per cent below capacity, sales are increasing. Commercial vehicle sales are growing at a double-digit pace on the back of a replacement demand.