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India Inc. turns in a solid showing despite regional turmoil

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Employees work on an assembly line at a Hero Motocorp plant in the Indian state of Rajasthan.   © Reuters

MUMBAI While many companies in China and neighboring economies saw their profits decline in the most recent fiscal year, those in India generally fared well.

Of the Indian companies included on the Nikkei Asian Review's Asia300 list, the 44 that closed their books by March 31 had racked up a 4.6% increase in net profits in fiscal 2015, which for most companies began in April 2015.

India's largely domestic demand-driven economy is less vulnerable to external downswings, and healthy consumption, especially in urban areas, helped bolster earnings -- though not every company was able to capitalize on these conditions.

STRONG SPENDING Based on data from QUICK-FactSet, the 44 Indian companies earned 2.39 trillion rupees ($35.7 billion) in combined net profit in fiscal 2015. Profit increased at 28 of the companies, more than half of the total.

"Demand for new cars is strong. It is important to produce enough vehicles to meet demand," said Kenichi Ayukawa, managing director and CEO of Maruti Suzuki India, a subsidiary of Suzuki Motor and the biggest carmaker in India. The company's group net profit rose 23% year on year in fiscal 2015, hitting a record high. Capitalizing on its more than 40% share of the Indian passenger car market, Maruti Suzuki released a string of new cars to spur demand. The company's plant operating rate continues to be over 90%.

Leading motorcycle manufacturers also performed solidly. Industry leader Hero MotoCorp secured 31% profit growth. "We made strong progress towards our strategic goals and delivered impressive performance, both in terms of sales and financials," Chairman Pawan Munjal said of the past year. Another major motorcycle maker, Bajaj Auto, saw net profit rise 25%.

India's consumer spending, which comprises about 60% of the country's gross domestic product, grew 7.4% in the year through March 2016, outpacing the previous year's 6.2% rise. Somewhat weak consumption in rural areas was more than offset by robust spending among the emerging middle class in urban areas. Net profit at Dabur India, whose mainstay products are consumer goods using natural materials, grew 18% in fiscal 2015.

Asian Paints, India's largest maker of paints, mostly for use in houses, logged a 24% increase in net profit.

Fourth-generation (4G) high-speed telecommunications service has begun spreading in India. Bharti Airtel, the leader in the mobile services industry, started offering 4G ahead of its rivals. The number of its wireless subscribers as of the end of March was up 11% from a year earlier to 251 million, and the company secured a 6% profit gain.

Though they have put some effort into overseas expansion, these companies continue to do the bulk of their business within India. At Maruti Suzuki and Hero MotoCorp, exports account for less than 10% of their production. Asian Paints makes more than 80% of its group sales at home, while the figure for Dabur India is just below 70%.

IT, service and pharmaceutical companies, the sectors most dependent on external demand, were also largely immune to the China-triggered turmoil, as they earn a majority of their sales in Western markets.

Tata Consultancy Services, the biggest IT services company in India, marked a 22% jump in net profit. The increase is attributable to brisk orders in the U.S. and Europe -- sales there represent 80% of the company's total. Sales from new digital technologies, including cloud computing, contributed to the higher earnings, accounting for more than 15% of total sales in the last quarter of the fiscal year.

In the pharmaceutical sector, Cipla fared well. Strong U.S. sales led to a 36% growth in exports of its generic drugs, which make up 60% of the company's total sales. As a result, net profit for the year rose 28%.

Companies in upstream industries, on the other hand, took a beating from falling commodities prices.

Resources companies saw some of the worst results. Vedanta reported net loss of 93.2 billion rupees in fiscal 2015 due to impairment losses on oil and gas assets. It was the company's second straight year in the red. Oil and Natural Gas Corp., meanwhile, posted a 23% profit fall.

The metal sector was also lackluster. India's biggest private steelmaker, Tata Steel, has been in the red on a net basis for two years in a row. The company was forced to sell off its troubled U.K. operations, which had been dragging down its overall business results. Major nonferrous metal producer Hindalco Industries is reeling from falling prices of its core aluminum products.

Reliance Industries, however, enjoyed higher profit margins thanks to falling costs of oil refining, its main business. Tata Power and other power utilities also benefited from cheaper fuels, including oil and coal. Of the 44 Indian companies on the Asia300 list, 13 belong to upstream sectors. Of these, seven posted profit fall or loss, while six saw gains.

CHANGE OR ELSE The Indian economy has now surpassed China's in terms of growth rate. But while some Indian companies are capitalizing on the favorable macroeconomic environment, the distinction between winners and losers is increasingly coming down to the ability to adapt to changing market circumstances.

At Tata Motors, Guenter Butschek, who took over as CEO and managing director in February, emphasized the need for reforms. "We would like to be measured by what we actually changed. We would like to come with more holistic sales and after-sales service to our customers. We have improved our execution quality as far as our new processes are concerned," he said at an earnings briefing in late May.

Tata Motors bet big on the Nano super minicar, released in 2009, only to see the project fail as demand shifted to larger, pricier vehicles. Plants built to produce the Nano have been unable to raise their operating rates. The company has been struggling with slow sales of cars under its own brands, and its profit fell 21% in fiscal 2015.

Capacity utilization rate at Indian manufacturers hovers around 70%, the lingering result of aggressive capital investment during the country's high-growth era. Failed product strategies at several companies have only exacerbated the problem.

In the IT service sector, third-ranked Wipro's earnings have levelled off. "TCS and Infosys have been faster in shifting to digital than Wipro," said an analysts at a major rating agency. No. 1 TCS and No. 2 Infosys are moving away from conventional labor-intensive services in favor of new digital technologies, such as cloud computing and artificial intelligence. Wipro's failure to do likewise is reflected in its business results.

Banking is probably the Indian sector most in need of industrywide structural reforms. A period of aggressive investment followed by years of stalled infrastructure projects means nonperforming loans have piled up.

The Reserve Bank of India, the country's central bank, has called on banks to dispose of most of their bad debt by next March. At government-owned State Bank of India, the biggest commercial bank in India, the proportion of soured loans climbed to 6.5% in fiscal 2015, up 2.25 points from a year earlier. The bank raised its loan loss reserves and in its stand-alone result, total provisions increased 26% from the previous year to 333 billion rupees, while its consolidated net profit fell 28%.

Arundhati Bhattacharya, chairman of the bank, stressed that they are "working very hard" to deal with its bad loans. "We are really and truly going through account by account and working a lot in respect to resolution activity," she said.

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