India Inc profit margins nearly halve in Apr-Sep

Written by Pradip Kumar Dey | Mumbai, Nov 2 | Updated: Nov 3 2008, 07:12am hrs
A slowdown in India Incs earnings growth is now visible. An analysis of second quarter results of 1,348 large companies shows a disturbing trend. While the revenues grew at a rapid clip of 38.2% over the same quarter last year to touch Rs 7.31 lakh crore, net earnings shrank 34.8% to touch Rs 48,126 crore.

This clearly depicts that the volume of business was strong, but input and manpower costs as well as interest rates have taken a toll on corporate profitability, says Gurudev Kamath, analyst with a Mumbai-based broking firm. This is evident in the net profit to sales ratio, or the net profit margin, a measure of overall profitability, which nearly halved from 13.96% in July-September 2007 to 6.58% in July-September 2008.

Also, the fact that stock and bond markets were in doldrums added to the fall in profits. India Inc, for the past several quarters, had been depending on income from these sources to show a strong quarterly growth. In fact, other income as a percentage to profit before tax was as high as 34%. Now, the ratio remains the same, because the profit before tax and the other income have decreased by the same proportion.

The other income number declined by 26.6% to Rs 23,819 crore in July-September 2008. Moreover, the fluctuating rupee caused many companies to take a blow on the earnings. Indias largest software company TCS had to write off Rs 261 crore on account of currency fluctuation.

But its not gloom for all. Overall, an industry-wise analysis indicates that fertilisers, construction, shipping, steel, banks, engineering, IT and FMCG have fared well in the second quarter (see chart).

The total net profit of 14 fertiliser companies rose by 245.1% to Rs 1,262 crore during July-September 2008 from Rs 366 crore during July-September 2007. The sales figure of this group also increased by 90% to Rs 17,177 crore during the quarter. Most fertiliser companies, such as Coromandel Fertilisers (net profit up 73.1% to Rs 184.41 crore), Zuari Industries (net profit up from Rs 40.98 crore to Rs 50.37 crore) and National Fertilisers. (net profit up 42.8% to Rs 57.34 crore from Rs 40.15 crore), recorded good profit performance during Q2.

Contrary to expectations, the trend in IT companies has been encouraging during Q2.The 85 IT companies posted a 12.6% jump in net profit to Rs 5,761 crore, while sales rose 25.3% to Rs 31,954 crore during July-September 2008. Satyam Computer posted a 38.6% rise in sales to Rs 2,701 crore and 43.2 % growth in net profit to Rs 597 crore in July-Sept. 2008.

However, the 31 companies covered in the construction sector saw a meagre 3.9% growth in their aggregate net profit to Rs 1,670 crore, while sales grew 28.2 % to Rs 9,498 crore during the second quarter. A rating agency analyst said: Though the results this quarter have been fairer enough but the real impact of the slowdown would be faced by the construction companies in the next quarter, with the economy facing trouble from all quarters. The sector is expected see declining margins on account of increasing input costs, slowdown of the economy and a consequent slowdown in demand, he added.

Among the 35 industry groups studied, 17 sectors recorded positive growth in net profit, while 16 industries, namely automobiles, hotels, jems & jewellery, media and pharmaceuticals, witnessed a decline during the second quarter.

Going ahead, analysts expect slowing revenues to have an increased impact on profitability and earnings growth. The third and fourth quarters are expected to see a slowdown in revenues as well and this will, in turn, impact profitability. The industry now looks ahead to the measures taken by the finance ministry and the central bank to alleviate the liquidity pains and stir up demand.

Additionally, the falling commodity prices should also cheer India Inc as this would reduce input costs.