Corporate results for the quarter ending June 2008 have thrown up mixed surprises. While there was an increase in overall income because of the growth in sales, the net profit margin came under pressure because of an increase in input costs and rising interest rates.
An analysis of BSE 500 companies shows that the total revenue increased by 37.7% in the quarter ending June 2008, compared to the same period last year. Net profit increased by 3.5% during the same period, but on a quarter-on-quarter basis it dropped by 4%.
On the expenses side, there was a steep rise in raw material costs, which increased by 54% for the quarter ending June this year on a year-on-year basis. Salary expenses of BSE 500 companies too increased by 26%. The most notable was the 32% increase in interest expenses because of successive increases in the prime lending rate.
Kaushal Sampat, chief operating officer, Dun & Bradstreet India, says corporate results for the quarter ending June 2008 were largely in line with expectations. ?Companies from the BSE 500 basket registered a top line growth of over 30% y-o-y. However, also as expected, the margins were under pressure mainly due to the increase in the cost of major production inputs.?
Despite the declining Index of Industrial Production trends, most companies were able to sustain high topline growth. ?The first quarter of the current fiscal witnessed good topline growth of close to 30%, which was primarily fuelled by price-led growth and we also witnessed large build up of inventories,? says S Ranganathan, head of research, LKP Securities Ltd. The consumer staple companies have not really felt the inflationary pressures during the first quarter as is evident in the results of large FMCG companies, adds he.
Echoing a similar view, Himanshu Varia, who looks after institutional sales at Asit C Mehta, a Mumbai-based brokerage firm, adds that corporate earnings have been surprisingly positively for the last two to three quarters. ?For the last three quarters, the view had become excessively bearish, but for the last three quarters in a row, the earnings have outperformed expectations. Even for this quarter (ex-oil) earnings grew by 13-14%.?
Capital goods did spring positive results despite corporates facing a challenging period of demand slowdown. Even metals and telecom sectors saw robust growth from the likes of Tata Steel and Bharti Airtel.
In fact, Tata Steel reported a net profit of Rs 1,488 crore in the first quarter ended June 2008, a growth of 21.78% over the corresponding period a year ago. Higher sales volume of the company drove the topline growth and international operations benefited from higher steel prices as around 80% of sales volume came from the company’s international operations.
An analysis of revenues by net sales, which reflects the demand of a company?s products and services, shows encouraging results. Net sales of BSE 500 companies have increased nearly 35% in the quarter ending June 2008 as compared to the same quarter last year. This clearly shows that high inflation rate and interest rate hikes did not have much bearing on sales.
Companies were able to sustain higher sales in value terms by passing on some of the increase in input costs to consumers. However, in the next quarter, analysts say, companies will have to take some hit from the rising input costs as any further increase in the price of their products will affect demand in the long run. Moreover, competitive pressures would prevent many companies from passing on any further rise in input costs to their customers fully.
?Sales growth for Q1 FY09 clearly brings out the robustness in demand and execution levels, depending on the companies and sectors,? says Himanshu Varia of Asit C Mehta. The subdued net profit growth at the aggregate corporate level points to a drop in the operating profits margins because of cost pressures in raw materials and wages, he adds. Further, net profits were lower due to depreciation, interest costs and in certain cases due to provisioning of mark-to-market losses on foreign exchange exposures.
In fact, an analysis of top 50 companies by market capitalisation shows that net sales for the quarter ending June 2008 increased by almost 39% as compared to the same quarter last year. Oil companies led the pack with Indian Oil Corporation?s net sales increasing by 42% and Reliance Industries? net sales increasing by 41%. The refining and marketing business contributed 67.3% to RIL?s revenues while petrochemicals accounted for 30.7% during the quarter. Revenues for the refining and marketing segment grew by 46% to Rs 32,587 crore mainly due to high product prices driven by costly crude.
The biggest surprise was the automobile sector, which showed significant dip in net profits resulting from declining sales and rising interest rates. Tata Motors, the country?s largest commercial vehicle maker, reported a 30% decline in net profits in quarter ending June as compared to the same quarter last year. This is the company?s worst quarter in the last six years. Similarly, Mahindra & Mahindra reported 17% decline in net profits in the same period as compared to the same quarter last year and Maruti Suzuki?s net profit was down by 7% for the same period.
In fact, sales growth of automobiles continued to dip in July, too. For the first time since 2005, sales growth of cars dropped by 1.71% to 87,724 cars this July, down from 89,250 cars in the same month last year. As many as seven of the 13 major carmakers posted negative sales. The sales of Tata Motors, India?s third largest carmaker, dropped 9%. The sales of Honda Siel Cars India, the fourth-largest carmaker, dipped by 7%. Market leader Maruti Suzuki India just about managed to post 1.5 % increase in sales.
Rising raw material costs have spiked the expenses of corporates. Raw material cost for the basket of BSE 500 companies for the quarter ending June 2008 has gone up by 53% on a year-on-year basis, denting their profits. Employee cost, on a year-on-year basis, increased 26% affecting companies in the IT and banking space.
The rise in input costs has put all automobile manufacturers in a difficult situation. The price of alloy steel has gone up by about 10% during the quarter and the prices of other key inputs like copper, aluminium and rubber have also increased by 15-20%.
Further, the government hiked excise duty by Rs15,000 on cars with engines between 1500 CC and 1999 CC and Rs 20,000 on 2000 CC engines. Thus, to tide over the rise in input costs, all automobile manufacturers have raised their prices from Rs 6,000 to Rs 30,000 across models.
Since raw material costs are rising continuously, companies will have to trim expenses and optimise the use of resources, say analysts. But the real matter of concern for companies is the rise in inventories, which is at an all-time high since the previous bull run that started in late April 2003. So, with rising inventories (stocks at warehouses) owing to drop in sales volume and a hike in the prime lending rate last month, the impact on demand and consumer spending will be seen more prominently in the next quarter.
Though rising interest rate is affecting certain companies, it is not deterring them from making capital expenditure and undertaking capacity expansion plans. The optimism of corporates is reflected in the continuously rising investments. In fact, at the end of June 2008 quarter, the Centre for Monitoring of Indian Economy?s (CMIEs) CapEX survey found that total investments stand at Rs 66,68,516 crore, up from Rs 60,62,795 crore at the beginning of the quarter.
The survey captured 440 new projects entailing an investment of nearly Rs 4.98 lakh crore. The CMIE report says that projects worth Rs 3.4 lakh crore are scheduled for completion during 2008-09. Some projects will get completed in the second half of the year and some may even spill over to the next year.
The optimism further comes from the August bulletin of the Reserve Bank of India, which says that strong domestic demand is likely to push up private corporate investments in this fiscal, but at a slower pace, owing to deceleration in global and domestic economies. ?Corporate incentives to invest are likely to remain strong in 2008-09 because of high domestic demand and high capacity utilisation rates amidst improved profitability of last few years,? the central bank notes.
The ongoing projects, says Sampat of D&B, may not be severely affected by hardening interest rates. ?However, forthcoming or planned investment may be postponed on account of high interest rates. It?s already happening. The number of new projects announced by corporate India in June 2008 stood at 386 as compared to 697 in the same month last year.?
Sandeep Shenoy, a strategist at PINC Research, says that capex is on track and most companies are going ahead with their plans. ?If at all there is a problem, it is on the implementation schedule front and not on financial closure front.?
The numbers for the quarter ending September this year will be amongst the keenly followed. Analysts feel that the impact of slower economic growth, soaring inflation and increased interest cost are likely to put pressure on the future earnings of corporate India.
Says S Ranganathan of LKP Securities,? Though corporate balance sheets have enough room for raising additional debt to fund growth plans, corporates that do not generate free cash would find rising interest rates and high inflation difficult to handle during the second quarter. Weak IIP numbers could moderate bottomline growth further during the second quarter in the industrial sector.?
Agrees Sampat of Dun & Bradstreet, ?It is unlikely that commodity prices would soften, interest rates will continue to remain high. Therefore, the pressure on profitability margins will persist in Q2 FY09. Further, if we see some dampening in consumer demand due to the impact of monetary tightening, the sales volume may be impacted as well, but perhaps to a lesser degree than the bottomline.?