India Inc gives a glimmer of hope

India Inc gives a glimmer of hope
Business Standard, May 1, 2009, Section II, Page 10

B G Shirsat / Mumbai

Though the net profit of the 514 companies that have declared results so far has fallen by 16.3%, it is far less than the 32.7% plunge they reported in Q3.

The performance of 514 companies, which have declared their fourth quarter results so far, indicates that cement, construction, fertiliser, personal care, power, telecom and two-wheeler sectors would do well in the final count. An in-depth analysis of these results by Business Standard Research Bureau has also found that software services and pharmaceutical sectors are poised to post a modest growth in sales and profit, while trading, metals, automobiles (heavy) and engineering sectors are expected to fair badly in the quarter ended March 2009.

Sales and margin performances of the 514 firms have been better than expected, though a clear picture would emerge once more results came in. These firms have reported a 0.4 per cent decline in sales, while their net profit has gone down by 16.3 per cent.

The decline in sales of the sample companies has been caused by private sector petrochemical and oil & gas giant Reliance Industries (RIL), which has reported a 24 per cent drop in sales due to subdued gross refining margins. If RIL is taken out, the average sales of the remaining sample firms have increased by 5.5 per cent. Though it is still too early to project any growth rate for the fourth quarter, initial trends suggest that corporate earnings are likely to be better than the third quarter.

On the operating margin front, India Inc has done better quarter-on-quarter (q-o-q) but faltered year on year (y-o-y). While the operating margin of the sample companies has shot up by 256 basis points (bps) q-o-q, the same has fallen by 190 bps y-o-y. This jump in operating margin points to easing of commodity and input prices as well as effective cost management by the corporate sector. A noteworthy point here is that the fourth quarter operating margin of the 514 companies is higher compared to the preceding three quarters.

During the third quarter ended December 2008, the same sample of companies had posted a 32.7 per cent decline in net profit, despite a sales growth of 14.2 per cent. The sales of the sample companies grew by around 30 per cent each in the first two quarters, but the net profit rose by only 5.8 per cent in the first quarter and 0.8 in the second.

The decline in sales growth in the fourth quarter means deflation, but corporate houses appear to be managing it fairly well by controlling the cost of production. Though sales growth has plummeted by 0.4 per cent compared to a growth rate of over 27.2 per cent a year ago, the total cost of production has gone up by 1.9 per cent compared to a 26.7 per cent increase during the same quarter last year.

A major saving for India Inc has come from the cost of raw material (RM), which declined by 17.5 per cent. In the first two quarters, the RM cost was 1,000-1,200 bps higher than the rate of sales growth. Also, the raw material, which accounted for 50 per cent of the production cost in the first two quarters, made up for 38 per cent in the third and 36.6 per cent in the fourth quarter. This was mainly because the corporate sector went for production cut due to demand recession.

However, the performance of the sample companies, excluding 95 loss-making firms, looks better in terms of profitability. However, excluding the loss-makers, the net profit of the remaining sample declined 4.9 per cent compared to 25 per cent decline in the third quarter. The operating margin looks healthy at 18.8 per cent, down by 19 bps y-o-y and 327 bps q-o-q. Interestingly, the fourth quarter operating margin of the non-loss making companies was the highest in the last eight quarters.

There was no surprise from software services companies, which have posted a single-digit growth in quarterly revenues, probably the first time in history. However, their net profit rose by 18 per cent, thanks to a 250 bps improvement in y-o-y margins due a cut-down in cost of salaries and wages and depreciation of the rupee against the US dollar. If software companies are excluded from the total sample, the decline in sales of the remaining firms stands marginally higher at 2.8 per cent, but their net profit witnesses a sharp decline at 17.4 per cent. Among frontline software companies, Infosys Technologies outperformed TCS and Wipro with robust growth in sales and profit. TCS and Wipro have reported a fall in net profit due to slower revenue growth.

The cement companies have given a pleasant surprise in the fourth quarter with a 17.5 per cent rise in sales and a robust 25 per cent growth in net profit. These firms have been benefited by the cost of production which was lower by 80 bps compared to the sales growth rate. But in the first three quarters, the production cost was 900-1,000 bps higher than the sales growth rate. Therefore, the q-o-q margin of the cement companies rose sharply by 575 bps, though the same was lower by 50 bps y-o-y. Among cement companies, Shree Cement recorded a robust 473 per cent rise in net profit, while ACC reported a decent double-digit growth in sales and net profit.

As was expected, two wireless services providers have done well with a strong revenue growth, but faltered on profitability due to a decline in average revenue per user (ARPU). Bharti Airtel, the leader, reported a 30.4 per cent growth in revenues, but its net profit grew by 7.8 per cent. Idea Cellular recorded a robust 47.9 per cent growth in revenue, but its net profit declined by 0.88 per cent. The Mahanagar Telephone Nigam Limited (MTNL), the basic telephone, mobile telephone and Internet service provider for Delhi, Mumbai, New Mumbai and Thane, suffered a setback as it posted a net loss of Rs 83.8 crore on account of a 7.5 per cent decline in quarterly revenue.