Corporate Sector continues to shine; led by Services

CII 'State of the Economy' analysis for the last quarter-Q4 (Jan-March) released in July 2007, shows that the impressive performance of the Corporate sector is consistent and led by the Services sector. CII State of the Economy has surveyed and analyzed results of 3283 firms comprising 1971 firms from manufacturing and 1312 firms from services.

According to the CII Survey, the impressive performance of Corporate Sector continued in the last quarter of the financial year 2006-07, showing consistency with the GDP growth rate of 9.1 per cent achieved in that quarter (Q4). On almost all the parameters, Corporate Sector is doing better during Q4 in comparison to the same quarter in the previous financial year.

The analysis shows that the net sales has recorded a growth rate of 19.35 per cent in the fourth quarter (Q4) as compared to the growth rate of 17.86 per cent achieved during the same quarter in the financial year 2005-06. The profit after tax (PAT) has registered a significant increase in the growth from 13.68 per cent in Q4 of 2005-06 to 19.12 percent in Q4 of 2006-07, owing to a lower rate of growth in input cost and operating expenditures.

The analysis finds that it is mainly the performance of the Services sector that has resulted in the overall increase in the profits growth of the corporate sector. The Services Sector has recorded a significant decline in the growth of operating expenditure from 16.33 per cent to 10.41 per cent while showing an increase in the growth rate in net sales from 16.48 per cent to 24.74 per cent.

Though the interest payments increased significantly showing a growth from 21.63 per cent to 47.68 per cent in Q4 of 2006-07, the Services sector companies have registered growth rate in profit after tax to the extent of 45.68 per cent against the growth in profit at the rate of 10.32 per cent in the Q4 of 2005-06. The growth rate of profit after tax of manufacturing has declined during the same period from 15.17 per cent to 7.91 per cent.

The State of the Economy has highlighted a distressing trend in the area of Agriculture - decrease in Oilseeds production. In fact, Oilseeds production, has registered a negative growth rate of 14.79 per cent. This is likely to lead to increase in the import of edible oil due to its reduced domestic production and rising demand. The demand is rising owing to the rising income levels and growing popularity of fast foods among the rich and upper middle class. Therefore, the CII State of the Economy Survey recommends that there is need to restructure domestic pricing policy of various crops as farmers are switching from oilseeds crops like mustard to more lucrative alternatives like wheat and gram.

It is interesting to note that the recently released Index of Industrial Production showing declining growth rate for manufacturing to 11.9 per cent in May 2007 from 15.1 per cent in April 2007 is in line with the warning given in this issue of the State of the Economy about the lagged effect of the increase in interest rate. The dip stick survey done by CII on behalf of National Manufacturing Competitive Council (NMCC) to assess the impact of the rise in interest rates had reported negative impact on business due to the increase in cost of financing.

The 'CII State of the Economy' also reports the negative impact of appreciating rupee on profit margins of textile and leather sectors. The CII survey of textiles and apparel companies engaged in exports revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9 per cent, 8.9 per cent and 7.9 per cent respectively and further, there could be an erosion of profit margins to the extent of 10.4 per cent during the next six months only on account of appreciation of the rupee. If the impact of rise in interest rates on the profit margin is also considered, then it is a further decline of another 1.5 per cent. The impact of the appreciation is worse in the leather and leather products sector. The erosion of profits expected in the next six months is 13.7 per cent and the industry is already facing an erosion of 8.8 per cent on its profit margin.

On the whole, the CII State of the Economy expects the GDP growth to be 9.2 percent during 2007-08; with Agriculture growing at 3 percent, Industry at 9.4 percent and Services at 11.2 percent.

(This is press release of CII)

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