Numbers point to lower demand, loss of pricing power, with net growth of only 5%.
India Inc’s performance in the July-September quarter was muted. An analysis of the results of 500 companies shows net sales grew 26 per cent, but net profit growth was only five per cent. This was largely due to a 230 basis points (bps) decline in operating margins and a hefty 46.3 per cent rise in cost of borrowing.
The results confirm the fear of a demand slowdown faced by manufacturing and services firms, as the net sales growth rate of non-petroleum firms has fallen below 20 per cent, the first such occasion in the past six quarters.
Also, many companies are losing pricing power. Many had been increasing prices for some time, due to input cost rises, but may not be able to do so now, since demand has started getting affected. Fast moving consumer goods companies say they are also seeing a large number of companies resorting to downtrading (reducing the number of features or quality, at a given price).
The rupee’s depreciation by around seven per cent during the July-September quarter also dented net profit, with unhedged foreign currency revenue and borrowings. The interest burden on Reliance Industries increased by Rs 160 crore on account of foreign currency loan exposure. Tata Consultancy Services reported a foreign currency loss of Rs 80 crore, while Infosys Technologies made a provision of Rs 33 crore for such losses. Bajaj Auto, Sesa Goa, JSW Steel, Sintex Industries, MRPL and Chennai Petroleum are among others that took a hit on their bottom line on forex losses, due to the adverse movement in rupee-dollar parity.
| MUTED PERFORMANCE Y-o-Y growth rate in net sales (in %) | |||
| Quarter ended | Total 500 cos | Excl Finance | Excl Top 7* |
| Sep ‘10 | 21.15 | 20.05 | 24.07 |
| Dec ‘10 | 19.21 | 18.42 | 24.39 |
| Mar ‘11 | 28.82 | 29.09 | 29.16 |
| Jun ‘11 | 31.81 | 32.95 | 26.43 |
| Sep ‘11 | 24.54 | 25.81 | 18.93 |
| Y-o-Y growth rate in net profit (in %) | |||
| Sep ‘10 | 23.68 | 19.77 | 22.75 |
| Dec ‘10 | 27.43 | 26.19 | 28.19 |
| Mar ‘11 | 34.70 | 36.04 | 37.89 |
| Jun ‘11 | 32.25 | 35.19 | 31.21 |
| Sep ‘11 | 4.81 | 4.53 | 0.31 |
| * Excluding 7 firms having Q2 net sales of over Rs 5000 crore and YoY growth of over 26% each, excl banks and finance | |||
As expected, consumption-linked and interest rate-sensitive sectors such as steel, construction, infrastructure developers, real estate, telecommunication, agro chemicals, auto ancillaries and non-banking finance companies were largely responsible for the squeeze in the net profit growth of India Inc for the quarter.
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The silver lining was the relatively better performance of private sector banks, information technology (IT), tobacco products, automobiles, cement, textiles, non-ferrous metals and refineries. These companies reported an average 18 per cent rise in net profit. If one excludes these sectors from the sample companies, the profit growth would have declined by 19 per cent year-on-year.
Margin pressure dented the profitability of Indian firms over recent quarters. The operating margins of 400 manufacturing and services firms fell by 184 bps to 18.8 per cent, as raw material costs jumped 33.35 per cent and borrowing expenses rose 46 per cent.
Going forward, analysts expect manufacturing and debt-heavy companies to see further erosion in their net profit growth in the next couple of quarters, due to another policy rate rise by the Reserve Bank of India. A weak order intake and elevated material prices are among major concerns for the capital goods sector.
Doing better
Thirty-seven IT companies reported an average 10 per cent jump in net profi, on the back of a 21 per cent rise in operational revenues, primarily because of strong growth by the large companies such as TCS, Infosys and HCL. Seventeen banks, mainly from the private sector, posted an impressive 24 per cent growth in net profit.
Volume growth continued to remain robust in the two-wheeler segment, with both Bajaj Auto and Hero MotoCorp reporting 20-plus per cent rise in net sales. Bajaj Auto, however, fell short of market expectations with a standalone net profit of Rs 725.8 crore, up only six per cent, primarily because of a mark-to-market loss (writing down the asset value to reflect current values) of Rs 95.4 crore on account of forward contracts.
Hero MotoCorp benefited by its highest quarterly sales volume and increased net realisation, to post a 28 per cent rise in net sales. A 240 bps increase in operating margins helped the company post 19 per cent increase in net profit, despite re-branding expenses, higher depreciation due to licence fees and a 117 per cent rise in interest cost.
The available result of cement companies suggested strong growth in net profit, despite higher input prices of raw material such as coal. The pricing discipline followed by these companies and a 20 per cent rise in realisations per bag helped the sector show healthy net profit growth.
The capital goods sector reported weak performance, due to the high interest rate environment which has significantly slowed the investment cycle. Larsen & Toubro reported a 19 per cent rise in net sales and its net profit increased by four per cent. A matter for concern was the muted revenue outlook issued by it.