India Inc has not only continued to grow both revenues as well as profits at a blistering pace in the third quarter of fiscal year 2004-05, but it has surpassed the rate of growth notched up in the September quarter.

A glance at the accompanying chart will show that corporate India's (1,500 companies excluding financial companies and banks) revenue growth in the third quarter is higher than that in the second quarter, and only slightly below the year-on-year growth in the first quarter.

That's essentially the story for operating profit and net profit growth as well, although profit growth in the third quarter is well below that reached in the first quarter.

Simply put, while the pace of growth had slowed down quite a bit in the second quarter, the third quarter results show that India Inc has been able to bounce back.

That picture changes only slightly if we leave out the oil companies. The profits of these companies are dependent to a very large extent on the vagaries of government policy.

They are also very large in size and, therefore, distort the overall picture. The growth rates for net profits of the non-oil companies also show a similar dip in the second quarter, followed by a bounce in the third quarter.

However, this time there is a slight deceleration in revenue growth compared to the second quarter, but hardly large enough to be significant.

On the other hand, the growth rate of operating profit in the third quarter for these companies is even higher than what it was in the first quarter.

This is not what was supposed to happen. After the growth slowdown in the second quarter, there were widespread fears about:

• the effect of a higher base, which would lead to a tapering off of growth;
• the impact of higher raw material prices, which would hurt profitability;
• the fact that many companies were reaching much higher levels of capacity utilisation, which would limit topline growth;
• the fact that interest rates were rising, which would limit profit growth;
• rising energy prices, which would hurt margins; and
• a less-than-normal monsoon, which was supposed to affect demand.

At first glance, it does seem that higher raw material and energy prices have started biting -- for India Inc as a whole in the third quarter, operating profits rose more slowly than revenues, indicating that margins had been hit.

Interest costs have once again started rising after several years. A closer look, however, shows that the entire compression in margin is due to the oil companies.

The non-oil companies have actually seen their operating margins expand by 141 basis points to 18.38 per cent on a y-o-y basis. In short, the growth in profits has occurred not only because of higher sales, but also as a result of margin expansion.

A large part of the growth in revenues has been contributed by the commodity producers. As the third panel of the chart shows, commodity companies' revenues rose by 29.9 per cent in the third quarter compared to 24.38 per cent for non-commodity companies.

Their contribution to overall profits is much higher -- operating profits of commodity companies rose by 67.54 per cent in the third quarter, compared to 13.96 per cent for non-commodity players.

The steel, metals and organic chemicals industries have been at the top of the revenue growth charts. Also showing very high rates of growth has been the shipping business, which too is a play on commodity and crude oil demand growth.

The refinery and construction sectors have also showed high revenue growth.

Agricultural commodity businesses such as sugar and tea have done very well in terms of operating profit growth. As a matter of fact, the average revenue and profit growth of the steel, cement, chemicals, petrochemicals and metals sector has been well above the average for all the non-oil companies combined not only in the third quarter, but for each quarter in 2004-05.

In other words, India Inc has been a major beneficiary of the global rise in commodity prices.

Nevertheless, commodity prices are by no means the whole story. The great strength of corporate India's excellent performance this fiscal has been its broad-based nature.

Capital goods manufacturers, for the most part, have been doing well, with operating profit growth as well as revenue growth being consistently high in each of the three quarters for manufacturers of electrical equipment and for engineering companies.

Automobile companies have continued on the fast track, while some textile manufacturers too have shown exceptionally high revenue growth. Cement and construction companies have also done very well. Even the service sector has been buoyant, with hotels and software posting good results.

Which are the industries that haven't been able to keep up the hectic pace? The personal care industry has been a laggard, posting single-digit growth in both revenues and operating profits in the third quarter.

What's more, growth rates in both revenues as well as operating profits have been consistently declining every quarter for this sector. The pharma sector, too, has disappointed, with a fall in net profits in the third quarter.

The two-wheeler industry has been badly hit by rising input costs. Refineries have also shown dismal results, thanks to their marketing margins taking a beating.

Of course, the best companies in each industry show rates of growth well above the industry average. While the top 100 companies (excluding oil companies) in the sample show a revenue growth of 24.64 per cent in the third quarter, lower than the 25.57 per cent revenue growth notched up by the rest of the sample, growth in both operating and net profits is far higher for the larger companies.

Operating profit growth for the top 100 companies was 38.08 per cent in the third quarter, compared to 10.98 per cent for the rest of the sample.

Going forward, it's clear that corporates have limited scope for further cost reductions, and in fact, the prices of many raw materials have already been raised in the New Year. The re-negotiation of annual contracts will increase raw material cost further.

And corporates have started to borrow more, which should raise their interest costs. India Inc's growth momentum will, therefore, increasingly depend on growth in volumes and prices.

Robust consumption demand should continue to drive volumes. But finally, the impact of a higher base will also be increasingly felt, as the momentum of the business cycle slows.

The commodity sector, which has been the main engine of growth for corporate India, is unlikely to provide the same level of traction. Growth is, therefore, likely to slow from the giddy pace seen in the third quarter.