Profitability expected to be impacted in December quarter

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Falling domestic demand as well as exports, shortage of raw material, power cuts and high cost working capital are likely to hurt India Inc’s production and profitability in the quarter ending December, according to a Business Standard report. These are concerns expressed by more than half the respondents in an industrial outlook survey conducted by the Reserve Bank of India (RBI).

The findings were released in RBI’s December 2011 bulletin. The survey covered 1,528 companies in the public and private sector having paid-up capital of at least Rs 50 lakh in the manufacturing sector.

The latest quarterly survey of the Federation of Indian Chambers of Commerce and Industry, drawn from 384 manufacturing units, had 87 per cent of respondents project continued moderation in third quarter (Q3) growth, due to slowing order books, moderate export growth and rising raw material costs. The survey covers both large units and small & medium enterprises from major sectors such as textiles, capital goods, metals, chemicals, tyres, cement, consumer electronics, batteries, automobiles, textiles machinery, leather & footwear, food processing.

The cost of funds will continue to rise in the third quarter ending December, a trend also seen in the previous two, the RBI survey revealed. Admitting to a further rise in interest costs, a Senior State Bank of India official said RBI was concentrating on containing inflation through a series of repo rate increases. In these circumstances, businesses have to be ready to face higher working capital costs.

Another public sector bank executive said with some easing of inflationary pressure, RBI may pause on raising rates. However, the cumulative effect of past rate rises would increase the burden of interest payments for companies in this quarter.

Punjab National Bank chairman and managing director K R Kamath said the impact on industry would be adverse, especially for micro, small and medium enterprises.

The gloomy industrial outlook is strongly reflected in the Business Expectations Index (BEI) compiled by RBI, which dropped to 109.4 for the quarter ended September from 116.3 in April-June. The drop has been significantly higher if compared to the expected BEI of 121.5 for the September quarter. The BEI for the December quarter has been expected at 118.8, but if the industrial outlook weakens, it could slip to around 100, which would be the such occasion after 10 quarters.

As many as 49.5 per cent of respondents in the RBI’s survey expect a rise in production for the December quarter. Past analysis, however, shows that respondents were very conservative in predicting a decline in production and often change their view in the assessment quarter.

Industry wise analysis shows the majority of industry groups, more visibly cement and textiles, are less optimistic on demand conditions. These industries also expressed the lowest optimism in overall financial situation. On cost of finance, pessimism was observed in all industries and more visibly in cement and basic metals industries.

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