It is no surprise that India Inc didn't manage to expand profits at the predictable 13-15 per cent in the June quarter and instead had to make do with a modest 9.5 per cent growth. After all, corporate profits were under siege from many quarters — high material and energy costs, and relentlessly higher interest rates which sharply increased the cost of doing business. However, what does cause consternation is the sheer number of companies (40 per cent of the top 500) that grappled with profit declines, the nasty surprises from blue-chip names and the unexpected sectors that performed poorly.

The ranks of companies reporting lower profit have swelled by a third since March 2011 and that can be traced directly to three trends. One, shrinking operating profit margin for a majority of companies suggests that the much-talked-of ‘pricing power' enjoyed by India Inc has its limitations and that companies are now having to make a trade-off between hiking prices further and holding on to their customers. Two, cost or profit pressures have begun to show up for consumer goods companies, which were wildly fancied in the stock market over the past year. The clear deceleration in white goods and automobile sales, the slowing retail sector and escalating non-performing assets of banks are all signs of weakening propensity to spend, at least on the part of the middle and low income consumers. Finally, execution delays and escalating cost of working capital have contributed to poor numbers from infrastructure and capital goods companies. Despite overflowing order books, some of these companies have struggled to deliver sales or profit growth. With interest costs beginning to bite and the start of round two of the global credit crisis, companies that are debt-laden or required to repay foreign currency convertible bonds, once again appear precariously placed. Anticipating some of these risks, institutional investors have already pruned their profit growth estimates for Sensex companies from 14 per cent to just 7 per cent over the past six months, but there is a risk of further downgrades after the latest results season.

It is indeed these uncertainties which have investors hesitating on the sidelines, even as the Sensex fell by over 23 per cent in the recent market fall. While the Sensex price-earnings multiple, at a modest 18, is well below its recent November 2010 high of 24, it is no easy task to identify companies that can manage even modest double-digit growth in these challenging times.

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