Business Confidence Survey - Oct 08

Hardly Any Great Expectations

Services and consumer durables industries have the best sales and production forecast among all categories. But companies are expected to struggle with rising prices during the next six months as well

IN THE current round of the ET-NCAER Business Expectations Survey, there is little that has changed in terms of the expectations that companies have about the business environment. More than 70% of the respondents expect sales to increase in the next six months, which is somewhat similar to the previous round of the survey in July '08. At the same time, companies' bottomlines are expected to improve, as 52.5% of the respondents expect a growth in net profit, compared to just 44.7% in the previous round.

The profitability outlook has improved because inflationary expectations are moderating. It seems that the various steps undertaken by the Reserve Bank of India (RBI) to cool down interest rates and other fiscal measures introduced by the government are likely to bring down the inflation rate to normal levels.

Though at an aggregate level, India Inc's sales forecast hasn't changed much, individual industries have shown signs of change. For instance, more than three-fourths of the respondents in the services sector expect sales to rise, compared to just 46.4% in the previous round of the survey. This can be construed as a good sign for the economy as services account for a major portion of the country's gross domestic product (GDP).

The capital goods industry has also witnessed a reversal in sentiment as 62% of the respondents think that sales will grow by more than 5%, compared to just 45.1% last time. This, again, is a positive sign as growth in the capital sector indicates an increase in investments, which is fuel for the economy. However, apart from services and capital goods sectors, no other industry has witnessed such a notable shift in sentiment in the current round of the survey.

India Inc's production outlook has also not changed too much compared to last time. The production outlook for capital goods companies in the next six months continues to be firm, while the outlook for consumer durables and consumer non-durables sectors is, in fact, better this time than in the previous round of the survey.

For instance, 84.2% of the respondents in the consumer durables industry expect sales to register growth, compared to 74.5% last time. This shows that the momentum is strong for consumer spending, which may rub off on other sectors as well.

The outlook on companies' profitability has also improved in the current round of the survey. However, one of the highlights of the survey is that a much lesser proportion of respondents expect profits to rise, compared to sales and production. For example, 71% of the respondents expect sales to go up and 73.3% expect production to increase, but only 52.5% of the respondents expect net profit to rise.

This proves that India Inc is still reeling under the ill effects of inflationary growth and companies are expected to struggle with rising prices during the next six months as well.

However, there is no doubt that the inflationary headwinds are currently weaker than last time, as only 62% of the respondents feel that the cost of raw materials will rise, vis-à-vis 70.4% last time. This is an important indicator, as it was the cost of raw materials that had pushed up prices across the spectrum during the previous round of the survey.

Only 40.6% of the respondents feel that prices will be hiked, compared to 49.4% last time. However, compared to raw materials, a much lesser percentage of respondents expect the prices of final products to go up. This is why companies' profit forecast is not as rosy as their sales or production outlook.

All in all, the current round of the survey indicates that India Inc's sales and production outlook is at par with the previous round of the survey. The services and consumer durables industries have the best sales and production forecast among all categories. However, inflation continues to be a challenge and it will be interesting to see how Corporate India's bottomlines fare in the next six months.

Karan Sehgal
karan.sehgal@timesgroup.com