Squeeze in profit margins

55 cos posted 38% rise in sales & 70% rise in net profit for the Jan-March quarter.

The corporate sector's profit margins seem to be under pressure. This is evident from the financial results of the 55 companies that have so far reported their performance for the quarter ended March 2005.

Hero Honda reported a marginal decline in net profit for the first time in the last eight quarters. The operating margin of Finolex Industries and Chemplast Sanmar on their PVC business declined to a third in the quarter ended March 2005 compared with that in the quarter ended March 2004.

The oil companies, which account for nearly a third of the corporate sector's earnings, are likely to report a squeeze in their margins during the quarter, because crude prices have been rising but product prices have not correspondingly risen.

Overall, the 55 companies, which announced their results for the January-March quarter, posted a 38 per cent rise in sales and a healthy 70 per cent rise in net profit.

Thanks to Infosys Technologies, ABB, Essar Steel and BEML, the operating, gross and net profit margins of the sample companies improved by almost 300 basis points during the quarter ended March 2005.

Operating margins were up from 21.08 per cent in the quarter ended March 2004 to 24.96 per cent at the end of the March 2005 quarter; gross profit margins moved up from 19 per cent to 22.87 per cent and net profit margins rose from 11.40 per cent to 14.04 per cent.

ABB, BEML, CCL Products, Essar Steel, Infosys Technologies, Mastek and Reliance Energy posted sales growth of over 35 per cent each. Bharat Seats, Chemplast Sanmar and Dwarikesh Sugar recorded single digit growth in sales while Bajaj Hindustan, Garware Shipping, Merck and Mphasis BLF recorded a decline in sales.

Companies such as Aztec Software, Bajaj Hindustan, BEML, Chemplast Sanmar, Essar Steel, Gati and Geodesic reported over a 100 per cent rise in net profits, while ABB, Infosys Technologies and Reliance Energy posted over 50 per cent growth in net profit. Hero Honda, Merck and Finolex Industries reported a decline in net profit during the quarter ended March 2005.

The comparative performance in the last four quarters of the 44 common companies in the sample is, however, quite encouraging. While the sales growth rate of these companies remained at over 30 per cent in the last four quarters, these companies posted net profit growth of over 55 per cent in the last three quarters in a row.

However, their net profit growth of 62.5 per cent in the quarter ended March 2005 was lower than the net profit growth rate of 73.5 per cent in the quarter ended December 2004.