Share of other income in profits falls as revenue growth improves

Written by Devangi Gandhi | Mumbai | Updated: Nov 12 2013, 15:23pm hrs
Over the last one-and-a-half years, non-operating income or other income has helped cushion the earnings of India Inc amid slowing revenue growth. However, in the latest round of quarterly earnings, the contribution of other income to profitability has come down as Indian companies reported healthier growth in their operating income.

An FE compilation shows the share of other income in net profit reduced substantially during the Q2 of 2013-14 for companies from all segments. For the analysis, we segregated 1,036 companies that have announced their quarterly earnings into three categories based on their market cap.

Sixty-four companies with m-cap of R8,000 crore or more were categorised as large caps. Those with m-cap between R2,000 crore and R8,000 crore were grouped as mid caps (84) and the remaining, with a m-cap of less than R2,000 crore, were categorised as small caps. Data show that other income, as a percentage of net profit, for all the three sets fell q-o-q in the three months ended September 2013. For large caps, the proportion of other income declined nearly 400 bps to a four-quarter low of 25.5%, even as mid caps and small caps saw much sharper declines.

The main reason for this decline was an improvement in the quality of profitability with the top line or operating income reporting robust growth on both sequential and y-o-y basis. For example, for the large-cap universe, total revenue from operations during the quarter saw a 23% y-o-y growth compared to 4% in the previous quarter.

"While the trend of higher other income contribution to profits is being seen for more than a year now, it is difficult to pinpoint one reason behind the rise or a fall because, in every quarter, the constituents may vary, said an executive with a domestic brokerage.

Other income generally represents cash flows that are not related to the main source of revenue or the core business operations of a company. It generally includes dividends, interest on investments, including those on fixed deposits and mutual funds, proceeds of sale of any assets or property and trading or sale of byproducts (especially for FMCG and commodity players).

Among large caps, the upturn in core income was visible for companies like Reliance Industries, Infosys, Hindustan Zinc, TCS, L&T, PowerGrid, Container Corp and Tech Mahindra whose collective other income stood at Rs 3,418 crore against R4,767 crore in the three months to June 2013. While each of these companies saw stronger growth in their topline compared to last year of 10% to 30% collectively, their top line grew nearly 20% y-o-y.

For mid-cap companies, the share of other income in net profit declined to 43% this quarter from a scenario in the April-June quarter where other income was higher than net profit for this subset of companies. However, this was due to heavy forex losses reported by companies like Essar Oil and Suzlon energy, which brought down the net earnings. As a result, other income for these companies stood at R1,908 crore, more than the net profit of R1,792 crore at an aggregate levels.

Notwithstanding the moderation seen in other income growth in the September quarter, such non-operational earnings continue to represent a significant proportion of Indian companies' profits. Among large caps, companies like RIL, L&T, Bharti, ACC, Ambuja Cement, Cummins India and Shree Cement have other income constituting more than 30% of the latest quarterly earnings.

As per Debasish Mallick, MD & CEO of IDBI Mutual fund, over the last two years, companies have been withholding capital expenditure plans and, instead, utilising surplus cash to increase investments in financial products, which, in part, adds to other income.

While FMCG players like HUL, GSK Healthcare and P&G Hygiene also saw a higher contribution of other income in their profits, for companies in stressed sectors like DLF and BHEL, other income remained higher than the net quarterly profits.

Other income of cash-rich PSUs like NMDC (Rs 538 crore), NTPC ( Rs 644 crore) and Cairn India (Rs 540 crore) accounted for 40%, 26% and 16% of their quarterly earnings, respectively.