Commodity firms dent Q4 performance

It is still early days, but corporate performance in the last quarter has raised fears that the commodity cycle could be coming off a peak.

Plagued by sliding global prices in metals and agri-products and a strengthening rupee, commodity companies dragged down what could have been an impressive quarter for India Inc.

A study of 1,030 companies by the Business Standard Research Bureau shows a phenomenal 59.8 per cent growth in profit "" the highest in the financial year's four quarters "" if Reliance Industries and non-ferrous metal companies are excluded.

Once they are factored in, the figure drops to 45.7 per cent, significantly lower than the over 60 per cent in the third quarter and nearly 50 per cent in the second.

Interestingly, taking out the numbers of these companies has the opposite effect on the profit growth figure for the third quarter, which drops to 50.9 per cent, as well as that of the second quarter (45.51 per cent).

The growth rate in sales and profits was driven by software and telecom companies. These companies' share in profit was 26.2 per cent, although they account for 13.7 per cent of the sales of the sample under study.

It is a similar story in sales, which grew 23.5 per cent in the fourth quarter, compared with 30 per cent growth in the three preceding quarters. The drag came from refinery companies, whose sales grew only 6.24 per cent, metals except aluminium (16.6 per cent) and aluminium (21.36 per cent). Excluding these, the sale growth rate was a healthier 27.64 per cent.

Fertilisers, chemicals, sugar, paper, tea and textiles also posted lower growth in sales and profits against the previous three quarters.

"Sugar prices came down by 20-25 per cent during the quarter. This squeezed the profit margins of companies," said Amar Singh, head of commodity research at Angel Broking.

The prices of polymers, petrochemicals, nylon and synthetic yarn and their intermediates have been keeping low as the manufacturing companies have been struggling to remain competitive against imports. Metal prices rose only towards the end of the fourth quarter.

Nalco's profitability (before interest and tax) in its chemicals division (mainly alumina) declined 67.35 per cent to Rs 253.46 crore in the fourth quarter, as spot alumina realisations fell nearly 47 per cent over the same quarter of 2005-06 due to surging global output.

The profit of Sterlite's copper division declined 16.4 per cent year-on-year.

"The last quarter performance of the non-ferrous metal companies was not up to the mark as prices went down globally. But they are recovering now," said Chirag Shah, research analyst with SSKI, a Mumbai-based brokerage.

Nevertheless, in the last quarter, the operating profit margins of the companies studied was the highest in eight quarters, moving up 175 basis points to 19.77 per cent. The increase is attributed to higher growth in sales (23.5 per cent) and lower growth in the cost of production (20.4 per cent).