Profit in Q4 dips despite 30% rise in net sales

Written by Shobhana Subramanian | Shobhana Subramanian | Mumbai | Updated: Jun 1 2010, 01:52am hrs
A good set of consolidated results from Tata Motors and Tata Steel might just turn out to be what the markets looking for. Stressed by the sovereign debt crises in the Eurozone and the possible consequences for the global economy, the profit numbers from Indias biggest automobile firm should be reassuring for the Street. More so because its the firms European subsidiary, Jaguar and Land Rover(JLR), which has done extremely well to turn in an earnings before interest, tax, depreciation and amortisation (ebitda) of 233 million, for the three months to March 2010, which is 21% higher than the number reported in the December 2009 quarter. At Tata Steel, Corus reported strong operating profits of $366 million. In fact, its Tata Motors business performance at home thats been somewhat disappointing with operating profit margins dented by 300 basis points despite the top line growing by a smart 36%.

The story has been somewhat the same for others companies, too. A study of the results for a pack of 2,500 companies shows that while the increase in net sales, for the three months to March 2010, has been a fairly impressive 30% year-on-year, albeit on a low base, profitability has weakened. Commodity players have among been the biggest gainersiron ore producer NMDCs March quarter numbers were boosted by higher price realisations with net sales up 25% sequentially. But, users of metals have been hurt and as such the operating profit margin for the sample has dropped by nearly 270 basis points year-on-year, thanks to the higher cost of raw materialsup 730 basis points year-on year. Thats not surprising because prices of most commodities have been high over the past year and have started trending down only in the last couple of months.

Tata Teas profitability was hit by a sharp rise in raw material costs; input costs were up 40%. While the company did raise prices like its peers, it lost out because consumers downtraded and the operating profit margin slipped by about 200 basis points. The Street believes some amount of margin erosion to continue. As Andrew Holland, CEO, Ambit Capital, points out margins could continue to remain under pressure. However, Kenneth Andrade, Head, Equities at IDFC Securities feels that prices of some commodities are coming off and therefore given that demand is steady, it should not be too difficult for companies to sustain margins at these levels. The growth in the top line shouldnt be an issue, he observes.

The bottom line growth for the sample, of nearly 36% year-on-year has been buoyed byhigher other income, which rose nearly 35% and lower outflows on interest, down 19%. The weak economic environment globally has dragged down profits for India Hotel, which reported rather disappointing consolidated results for the year to March 2010. The hotel chain posted a loss of Rs 99 crore; while Citigroup had expected the numbers to be weak, the firm didnt meet even the muted expectations. ITC saw a 31% increase in revenues, despite the higher taxes levied on cigarettes.