The first quarter financial performance of Indian companies was a paradox: while sales grew at a record pace, profit growth was the slowest in the past 11 quarters.
An analysis of the results declared by 2500 companies (with a quarterly sales of at least Rs 1 crore each) in the three months ended June 30 shows that sales grew 37 per cent, largely helped by oil companies that benefited from record crude prices and galloping orders booked by capital goods, infrastructure companies and price increases of fertilizer companies.
Net profit, however, took a knock due to rising input costs, losses from hedging of foreign exchange earnings and higher wages. Without the provisioning for wages and mark-to-market losses, the quarterly profit would have jumped to 38 per cent.
Sectoral analysis
Fertilizer companies showed an unexpected 60 per cent jump in sales as the government increased the subsidy to compensate for the higher raw material prices. The analysis shows food processing, pesticides, agrochemicals, industrial gas and explosives, computer education and cement firms, recorded a healthy 40 per cent growth due to higher income and increased industrial activity.
The software sector, after growing at a scorching pace of more than 35 per cent for the past five years, grew at a moderated pace of 25 per cent in the period after a slowdown in the US and other major economies crimped fresh orders.
Power cables grew at a higher rate of 25 per cent helped by demand from telecommunication and power companies. Still, the top line of telecommunication companies grew at a moderate pace, or the same as the cable sector, because of the government’s initiative to rationalize tariffs. Chemicals, leathers, entertainment and steel also grew at a similar pace.
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Passenger cars, diversified companies, paints, pharmaceuticals and tyre manufacturers posted 20 per cent-plus revenue growth.
Higher interest rate because of galloping inflation curbed demand for automobiles. Commercial vehicle sales grew by 18 per cent driven by tractors and LCVs. Motorcycle producers saw sales rising 12 per cent even after hardening of interest rate. Auto ancillary makers, which derive demand from automobile sector and original equipment manufacturer, posted a modest revenue growth of 15 per cent.
Foods products (manufacturers of biscuit and dairy products), tea, personal care products, sugar, consumer durables, cigarettes, textiles and retailers, which faced price competition, expanded revenue by 10-15 per cent.
A price freeze on the cement and metal industries affected the revenue growth of the companies in the sector. The growth of airlines and road transport firms was affected due to a rise in fuel prices.
Profit growth drops
However, the strong revenue growth of the Indian companies, mainly from oil, capital goods and other export oriented firms, did not translate into higher profit growth largely on account of higher provision for salaries and wages.
Public sector undertakings set aside Rs 2,600 crore for higher wages in the quarter ended June 2008 anticipating a revision based on the recommendation of the Sixth Pay Commission.
Profits were also hurt as 120 companies reported a loss of Rs 8,900 crore arising from derivatives used to hedge foreign currency exposure including loans and convertible bonds.
The rupee fell by about 8 per cent against the US dollar in the three months ended June belying the expectation of companies. The rupee had appreciated more than 10 per cent in the fiscal year ended March 31.
Cost pressure
The performance was also hit by climbing raw material costs and higher interest rates.
The total cost of production was up by 351 basis points (one basis point is 1/100th of a percentage point) over the sales growth of 37.45 per cent. The sectors that were affected the most were from commodity, consumer goods, capital goods and services sectors.
The rise in the interest cost was a major concern for companies that have borrowed heavily from overseas and domestic markets for expansion and working capital requirement. The FCCB issuers faced the trauma of paying interest to overseas investors on lower conversion of FCCBs on account of a steep decline in the market value of shares.
Overall, the interest cost in the first quarter increased by almost 69 per cent
Going forward, the rise in the cost of funding is likely to impact the execution of infrastructure, real estate and funded construction projects. The overall interest rate continues to remain high in the medium term which will impact the profitability of capital-intensive sectors.
The exceptions
Around 25 odd sectors, mainly from agro-chemicals, agro products, fertilisers and chemicals, exporters of iron ore, mining and minerals witnessed expansion in margins by over 100 basis points due to higher price realisation.
The net sales of these high-margin sectors rose 33 per cent while net profit was up by 69 per cent. However, these sectors could not turn around the overall corporate performance as their share in sales and net profit was just 10 per cent and 21 per cent, respectively.