Pressure Points

Written by Pradip Kumar Dey | Updated: Dec 6 2009, 02:29am hrs
Though the Indian economy is recovering slowly, the consolidated profit performance of corporate India is not in a good shape. The last three-year period spanning from 2006-2007 to 2008-09 was a difficult phase in the Indian economy. All the key industries of the economy namely construction, cement, steel, automobiles, textiles and tyres witnessed negative growth in their consolidated bottomline during 2008-09. Though the topline growth was positive during the period, 2008-09 and the second quarter of 2009-10 was tough for corporates of the country.

The sub-prime crisis in the US engulfed the biggies of Wall-Street leading to a severe liquidity crisis across the world. Most of the industries are facing the brunt of liquidity crunch with delayed expansion, overseas acquisition, higher interest costs, lower sales and profitability. Export dependent industries like textiles, gems and jewellery have been severely hit. Construction, cement, steel and automobiles have shown a dismal performance during 2008-09 and the second quarter of 2009-10.

Says Kishore P ostwal, CMD, CNI Research, In July-September 2008, commodity prices were ruling very high and most companies were sitting on comfortable inventories. In October 2008, the global market crashed and commodity prices fell vertically. This impacted the bottomline for two quartersOctober-December 08 and January-March 09. The market stabilised during the March quarter and fresh inventories were built up in that quarter at lower prices. As a result the April-June09 quarter was better than expected even though the economy did not recover. This had some impact in the July-September 09 quarter. The result was that the bottomline was down.

An analysis of 670 companies shows that they posted 20.3% decline in their aggregate net profit to Rs 1.66 lakh crore in 2008-09 after reaching positive growth of 31.8% during 2007-08. The findings are from a study of three years consolidated data (2006-07 to 2008-09) available with FE Research Bureau

Their net sales growth was 20.7% in 2008-09, which is lower than the growth of 30.8% in 2007-08. Though 2008-09 was not good for corporates in terms of sales and net profit growth, but some industries like engineering, entertainment, fertilisers, personal care, sugar and electronics showed higher growth in net profit during 2008-09 as compared to the year 2007-08.

Though the consolidated sales growth of Corporate India was positive in 2008-09 and 2007-08, the second quarterly sales growth of 348 companies was negative at 9.9% during July-September 2009 from the level of July-September 2008. On the other hand, like 2008-09, the consolidated net profit growth of Corporate India was negative at 32% during July-September 2009.

Says an analyst from a Mumbai-based rating agency, The reasons for the negative growth can be attributed to lower exports, declining domestic consumption, fear of job losses, rising interest rates, depreciating rupee affecting imports, liquidity crunch and slump in real estate industry.

Consolidated other income of 670 companies decreased by 19.8% to Rs 45,455 crore in 2008-09 from Rs 56,694 crore in 2007-08 after an increase of 28.7% from Rs 44,057 crore in 2006-07. Other income contributed substantially to the downward trend in bottomline. In the second quarter also, the consolidated other income of 348 companies decreased by 2.2% to Rs 4,603 crore during July-September 2009.

Growth of interest outgo of 670 companies increased from 49.5% during 2007-08 to 55.0% during 2008-09. In the second quarter the interest outgo of consolidated companies also increased by 4% during July-September 2009.

Net profit margins (net profit to sales) of 670 companies increased marginally from 10.46% during 2006-07 to 10.54% during 2007-08 and dec-lined significantly thereafter to 6.96% during 2008-09. In July-September 2009, the consolidated profit margin of 348 companies decreased significantly from 10.81% to 8.15% during July-September 2009.

Industry-wise, construction companies have shown a decline in consolidated sales and net profit during 2008-09 from a positive growth during 2007-08. The growth of net sales of construction companies was -0.9% in 2008-09 from a positive growth of 75.5% in 2007-08. Similarly, the net profit growth also turned out to be negative at 47% in 2008-09 from a positive growth of 142.6% in 2007-08. The net profit to sales ratio of construction companies increased from 18.55% during 2006-07 to 25.65% during 2007-08 and decreased thereafter to 13.73% during 2008-09.

In the second quarter, the growth of sales and net profit was negative at 21.3% and 62.7% respectively during July-September 2009. The profit margin also decreased from 29.74% during July-September 2008 to 14.11% during July-September 2009.

Cement & products: The cement & products companies, which form part of the study, registered a negative growth of 17.9% during 2008-09 from a positive growth of 16.1% during 2007-08. But the consolidated sales growth of cement companies increased from 18.1% to 22.7% during the study period. The net profit to sales ratio of cement companies steadily decreased from 21.45% during 2006-07 to 14.12% during 2008-09.

But in the second quarter, the consolidated net profit growth of 348 companies was positive at 24.8% as against a decline of 11.3% in sales. The profit margin increased from 13.03% during July-September 2008 to 18.32% during July-September 2009.

During last couple of years, cement industry is feeling the pinch of slowdown in the economy. During the period April-November 08, the growth of domestic cement consumption has slowed down to 8.2% on Y-o-Y basis compared to double digit growth of 10.3% registered in the same period last year. Moreover, cement industry has witnessed substantial capacity addition of about 16.5 million tonnes since the beginning of this fiscal following addition of 23 mn tonnes in FY 08. As a result, the utilisation rate of the industry has declined to a level of 85% compared to 94% during the same period last year. With the impending economic slowdown and a lull in the real estate sector, the topline growth of cement companies remained bleak during 2008-09 and the first half of 2009-10.

Steel companies have posted a negative growth of 43.3% in their consolidated net profit during 2008-09 as against a positive growth of 87.4% during 2007-08. While sales grew 13.3% during 2008-09 from a significant growth of 126.5% during 2007-08, the profit margin of steel companies decreased steadily from 13.92% during 2006-07 to 11.52% during 2007-08 and further to 5.77% during 2006-07.

In the second quarter, the consolidated net profit turned out to be negative at Rs 1,522 crore during July- September 2009 from a profit of Rs 5,883 crore during July-September 2008. And the sales decreased by 37.2% during the above period. As per the latest data from Joint Plant Committee, during the period April-August 08, crude steel production in the country has grown by 4.3% on Y-o-Y basis. But the consumption of finished steel during the same period has slowed down at 9.2% on Y-o-Y basis compared to growth of 13.9% registered in the same period last year. In line with FY08, India remained net importer of finished steel products.

Says an analyst from a rating agency, Owing to the interventions by the government, steel prices have slightly softened during the first quarter of 2008-09 and remained almost stable in the second quarter. Due to the inability to pass on the increased raw material cost, leading steel companies (especially non-integrated companies) are facing margin pressures.

The auto companies under study registered a negative growth of 96.2% in consolidated net profit during 2008-09 from a positive growth of 3.4% during 2007-08. But consolidated sales growth increased from 15.6% during 2007-08 to 41% during 2008-09. The net profit to sales ratio of auto companies decreased from 6.59% during 2006-07 to 5.90% during 2007-08 and decreased thereafter to 0.16% during 2008-09.

But in the second quarter of 2009-10, the consolidated net profit of automobile companies turned out to positive at Rs 84 crore during July- September 2009 from a loss of Rs 841 crore during July-September 2008. The industry growth was aided by the governments thrust on road infrastructure development played a significant role as it facilitated the evolution of the hub and spoke model of transportation of goods in the country.