Trends from the financial results for the quarter ended March 2009 show companies have been able to save on their topline margins by cutting down on expenses.
The volatility of the rupee during the entire financial year has affected profitability of several companies and only a handful of them have actually reported their mark-to-market losses. Since the deferment of Accounting Standard 11 till 2011 permits amortisation of forex loess, it has helped companies to alleviate profitability related pressures. However, the deferment will be open to more debate as these losses are not recognised in the profit and loss account and there will also be a deferred tax implication.
An analysis of 140 companies from the BSE 500 list which have declared their quarter ended March 2009 results till April end show total revenue net of indirect taxes has gone up by 5% year-on-year. But on a quarter-on-quarter, it dropped by minus 2.9% as sales volume saw a sharp dip.
The quarter ended March saw the highest outgo of interest expenses. It rose by 27.3% year-on-year as compared to around 10% in the financial year 2007-08. Disaggregating the total sample into manufacturing (76) and services sector (64) companies, data shows that manufacturing sector was the worst affected during the six-month long severe credit crunch. As companies had to borrow at higher interest from the debt market to fund operating expenses, the interest expense of manufacturing companies in the sample rose by a whopping 63% year-on-year.
The steep increase in interest outgo was mitigated to some extent by reduction in raw material expenses and wages and salaries. As a result of the right sizing drive by corporate India specially in IT, financial services and infrastructure sectors, expenses on wages and salaries dropped 5% quarter-on-quarter.
A sharp drop in global commodity prices since December last year helped most companies to reduce their aggregate expenses. Raw material expenses for manufacturing companies in the sample dropped 12.6% and overall to about 9% year-on-year. During the quarter ended March 2009, most companies were actually clearing the piled up inventory and deferred their purchase of raw materials. These helped them to mitigate the rising input expenses in the previous two quarters.
The drop in commodity prices has helped small and mid-size companies to save on costs. In fact, higher commodity prices means higher profit for large companies as was seen in the previous two quarters where the Sensex companies witnessed a peak in earnings. To remain competitive, large companies will now have to review their retail pricing as some mid-sized companies have already reduced prices of its products to garner a larger market share.
The rise in interest expenses indirectly affected financials of banks. As they became risk averse during the last two quarter, total credit growth for the entire banking sector has fallen to a five-year low at 17%. Corporate lending rates of private sector banks are still high and companies will have to look for alternative cost-effective source of funds. Despite low lending, banks have gained in the quarter ended March 2009 because of significant bond gains due to a drop in yields.
The financial results show that there is a significant buffer in the domestic economy led by sales growth in the rural sector. Also IMD?s recent long-period forecast of near normal monsoon this year would further reinforce the ability of rural consumers to provide some offset to the slowdown.
For corporate India, the intensity of stress that companies have witnessed during the quarters ended September and December has eased now following the series of rate cuts by RBI. There are some signs of revival in the economy as the results of steel, cement and automobiles companies show. This may be one reason why the Sensex has been reporting gains for seven weeks in a row and many scripts have surged past the broader index. The final outcome of the elections will be an important factor for the prospects of companies in quarters ahead.
?saikat.neogi@expressindia.com