Business Standard

First quarter: Story of a slowdown

Sales highest in last five quarters, but profits under pressure due to rising cost of production and interest rates

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B G Shirsat Mumbai

India Inc’s performance in the April-June quarter signalled that sales growth was robust at 30.3 per cent, the highest in the last five quarters. But growth was largely aided by a small clutch of companies in the oil and gas (O&G) sector, including refineries and oil marketing companies. After taking out these companies, the sales growth dipped to 22.7 per cent.

Most of the other sectors took a hit due to an increase in the cost of production and interest burden, which has slowed net profit growth.

The preview, based on the estimates of 478 companies by nine brokerage houses, indicated the pressure of input costs was likely to hit operating margins by at least 100 basis points (bps). The companies were expected to post 27 per cent increase in net sales and a strong 25.8 per cent rise in net profit. (Click here for Sector Watch)
 

SECTOR-WISE GROWTH RATE
Quarter Ended
y-o-y in %
Growth in salesGrowth in net profit
10-Jun11-Jun10-Jun11-Jun
Auto Ancillaries38.6423.1454.8611.00
Automobiles48.3620.90191.977.84
Capital goods13.1714.97-20.2012.20
Cement6.2413.98-32.49-7.51
Chemicals39.7423.3125.3529.42
Construction24.7214.7230.670.47
Fertilisers5.5525.2154.9526.18
Manufacturing22.0322.3613.6522.64
Metals28.5231.6157.4841.03
Oil and gas*48.3142.84-9.7651.33
* Ex OMC

 

The operating margins on sales (excluding other income) for manufacturing and services companies slipped below 10 per cent to 8.93 per cent, as three oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — together reported an operating loss of Rs 8,697 crore.

While the operating margins looked healthy at 12.90 per cent, excluding OMCs, there was a decline of 88 basis points compared to last year’s level of 13.8 per cent. The significant decline in margins was largely on account of a rise in costs of raw materials as percentage of net sales, which has increased by 325 basis points over the level a year ago.

Interest costs rose sharply, by 30 per cent, compared to a rise of 15 per cent in the June 2010 quarter. The interest costs accounted for 34.2 per cent of the net profit, compared to around 22-25 per cent of net profit in the last three years. The rise in the costs of borrowing was significantly higher for oil and gas (up 33.6 per cent) and services (up 30.7 per cent). The interest costs of manufacturing companies increased 27.3 per cent, compared to 22 per cent in the March 2011 quarter and a single digit during the quarters ended December 2010, September 2010 and June 2010.

India Inc’s net profit increased 14.4 per cent during the quarter under review, driven by 51 per cent rise in net profit posted by oil and gas companies (excluding OMCs). The profit growth rate declines to 10.3 per cent if we exclude oil companies from the sample. Manufacturing companies managed a decent 13.6 per cent rise in net profit while services companies, including hotels, healthcare, IT, construction, media, realty and transport sector, recorded a marginal 4.8 per cent rise in net profit. Small- and medium-size companies have suffered a decline in net profit for the second consecutive quarter.

Moderation in overall earnings growth in the first quarter will not come as a surprise, but there is considerable room for surprise at the company level. For example, while Infosys Technologies and Wipro underperformed the technology segment, Tata Consultancy Services did extremely well, posting 31 per cent revenue growth and 27 per cent growth in net profit. Bajaj Auto’s sales and profit moved at a slower pace compared to earlier quarters, but the company performed better than industry leader Hero Honda. Dr Reddy’s Labs did better than Cadila Healthcare and Biocon. Godrej Consumer outperformed Colgate in the personal care category.

Among auto ancillary makers, Bharat Forge (net profit up 63.9 per cent) and Bosch (up 33 per cent) did well compared to Motherson Sumi, Exide Industries and SKF India. Steel Authority of India (-28.8 per cent) underperformed JSW Steel in the steel segment, while EID Parry and Shree Renuka Sugars outperformed their peers by posting healthy growth in net profit. Bharti Telecom and Idea Cellular remained in the black, but reported a decline in net profit, while MTNL continues to be in the red for the seventh quarter in a row and Tata Teleservices bleeds for the fourth consecutive quarters.

Small and medium enterprises (SMEs), with annual net sales of below Rs 725 crore, underperformed the corporate sector in the June quarter, with slower growth in net sales (up 15.4 per cent) and two per cent decline in net profit. SMEs were hit by lower pricing power and significant rise in input and borrowing costs. This was the second consecutive quarter of decline in profit for SMEs.

The interest cost moved up 26 per cent in the quarter, and was up 31 per cent in the March 2011 quarter, a modest 15 per cent in the December 2010 quarter and a single digit in September 2010 quarter. The cost of raw materials remained higher by 150 basis points over net sales in the three quarters. Of the 1,328 SMEs studied, 1,134 reported net profit growth of 20 per cent in the June 2011 quarter. The remaining 194 reported aggregate net losses in the last nine quarters in a row.

The operating margins from sale of products declined to 8.42 per cent from over 9.25 per cent in the previous three quarters. Nevertheless, revenue and profit growth for SMEs has come from auto ancillaries, chemicals, paper, software, sugar and non-ferrous products.

The significant slowing in revenue growth rate and decline in profit were seen in sectors like steel, pharmaceuticals, cement, fast-moving consumer goods, power, oil drilling, gems & jewellery, alcohol and realty.

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First Published: Aug 16 2011 | 12:39 AM IST

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