The margin story

Last Updated: Thu, Nov 08, 2012 19:30 hrs

After four successive quarters of disappointment, corporate results showed encouraging trends in the quarter ended September 30, 2012. An analysis of 1,071 companies (excluding banks and other financial entities) by the Business Standard Research Bureau, reported in this newspaper on Wednesday, indicated that most key margins have improved. There has, however, been a slowdown in the sales growth rates. Compared to the July-September 2011 quarter, net sales have grown by 14 per cent, which is lower than the average sales growth rate of about 21 per cent in the previous four quarters. Offsetting slower growth, operating profits rose 19.7 per cent — the first double-digit climb in five quarters. Net profit adjusted for extraordinary items also rose 20.6 per cent, which is by far the best result in the last five quarters. Best of all, interest costs have risen only 7.7 per cent, a sea change compared to an average increase of 51 per cent across the previous four quarters. Notably, the absolute interest burden has declined 11 per cent compared to the first quarter (Q1) of 2012-13. The number of loss-making companies declined from 233 in Q2, 2011-12, to 221 companies in Q2, 2012-13. Their cumulative losses also declined by 10 per cent to Rs 2,600 crore. 

Other ratios, too, improved. Operating margins are up year-on-year, to 18.5 per cent from 17.7 per cent in Q2, 2011-12. Net profit margins (stripped of extraordinary items) are also up, to 9.2 per cent from the earlier 8.75 per cent. Total expenditure rose by 13.5 per cent, compared to an average rise of 25 per cent across the last five quarters. Expenditure net of raw material and interest costs has also fallen compared to the past two quarters (January-March 2012 and April-June 2012). Cement has delivered yet another standout performance with 86 per cent profit growth over Q2, 2011-12. Agro-chemicals (up 58 per cent), non-ferrous metals (+30%), software (+29%), FMCG (+ 22%) and infrastructure developers (+21%) have all done well, with adjusted net profits growing at better than 20 per cent. In contrast, automobiles (-4 %), capital goods (-9%) and steel (-24%) have registered lower profits than in Q2, 2011-12. Clearly, India Inc is coping better, given a slightly easier environment. Inflation remains high and so do policy interest rates. But fuel and power costs have dropped and some softening in other non-food commodities is visible. The raw material-to-sales ratio fell to 44.6 per cent in Q2, 2012-13, versus 44.8 per cent in Q1, 2012-13. Interest rates have been steady through the past six months. The rupee’s stabilisation is reflected in net foreign exchange gains.

However, this is scarcely a full-fledged recovery. The flattening growth indicates slack demand. The drop in auto profits underlines the fact that big-ticket consumption is on hold. Businesses are deferring investments and expansion plans, which is at least partially responsible for lower interest outgo. The poor performance of the capital goods segment is a pointer to low investment levels as well. On the basis of profit growth numbers, it could be argued that the economy has bottomed out, but it is too early to proclaim that the first green shoots of resurgence are visible. Companies will hope for some demand momentum from the festival season, as well as that the Reserve Bank of India will finally cut rates in its next monetary policy review, as its governor, Duvvuri Subbarao, has recently hinted. If improved sentiment in the secondary market translates into primary market recovery, it may be possible to raise equity capital, funding expansions at lower cost.

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