It’s in-the-inventories, stupid

“A public opinion poll is no substitute for thought.”
                                                                    –         Warren Buffett

CNBC-TV18s Research Analyst, Haresh Soneji

As always, the devil is in the detail. The world may be all praise on India Inc.’s performance, but the cat is on its way out of the bag. If you look closer, India Inc.’s gaping hole is beginning to show up. And it could well get worse. Here are valid reasons. Much of the rise in sales for the previous couple of quarters can be easily attributed to price growth rather than volume growth. That’s beginning to show now and in the coming quarters, slowing volume growth is definitely going to hurt India Inc. and investors alike. India Inc. knows and acknowledges that it position to increase prices is weakening.

It’s a sort of a vicious circle, and India Inc. is getting caught into it. Getting rid of inventories will force companies to cap prices. This in turn would slow down price growth with volume growth certainly not expected to pick up in the coming quarters. The bottomline – slowing PAT growth. That’s only one of the reasons. The others are concerns over interest expenses and increasing input costs. In short, one mess leads to another and managing one topples the other. That’s not good news.

On the positive front however is the dawdling other income. Though PAT growth is a meager 13% y-o-y, the APAT (PAT minus other income) growth is up a decent 27%. Here’s some explanation. Having tasted blood on exotic derivatives and then the aftermath with big losses, India Inc. has now decided to distance itself from such exposures. This has marked in slowing of other income on a year to year basis. On a sequential basis however, it’s still up reflecting the impact of depreciating rupee. Nonetheless, exposure is definitely on the decline, with few fresh trades being made on this front. Other income through land sales is also passé now.

OPMs have inched up on the back of volume growth, but NPMs have shrunk 300bps (100bps=1%) as high input costs hit the bottom line. The table hereunder throws the detailed report card. Look at the marked 468% rise in inventories. Its not inventories alone. India Inc. has been pushing dealers with various tricks in the book to buy stock, including arm twisting mechanisms. Various dealers would vouch on this front, but not cry foul in public. This would stop someday soon. Demand drop is evident; you just need to scratch the surface.

These are first set of numbers (162 companies ex-oil & financials) from India Inc. The report card certainly does not reflect the complete picture, but the first set of numbers generally gives a trend of things to come. Going by this trailer, the movie doesn’t really seem to be a blockbuster.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.