India Inc's profit grows at 3.57%

Rise in production cost pulls down margins to a 14-quarter low.

The rising cost of production has pulled down the profit growth rate of India Inc to a 14-quarter low of 3.57 per cent in the quarter ended December 2005.

The cost of production in this quarter rose 18.20 per cent, compared with corporations' sales growth of 15.62 per cent.

The 258-basis-point rise (one basis point is one hundredth of a percentage point) in cost of production over sales clipped the operating profit growth rate of 1,700 companies to 1.99 per cent. Similarly, operating margins dropped by 221 basis points to 16.57 per cent during the quarter under review.

Raw material, a major component in the cost of production, rose 21.7 per cent and labour costs increased 17.7 per cent. Another contributing factor was the rising interest cost for the manufacturing sector.

The cost of interest during the quarter ended December 2005 rose 10.2 per cent compared with a modest 0.87 per cent in the quarter ended September 2005. Of the 110 sectors studied, operating profit margins declined for 50. The margins moved up a little for 15 sectors and for the remaining 45, they rose between one per cent and five per cent.

The margins of refineries, steel, aluminium, sugar, shipping, pesticides and public sector banks have eroded. But hotels, cotton textiles, cement, personal care, construction and engineering saw improvement in margins.

Refineries and marketing companies played the spoilsport in the profit growth rate of the corporate sector. Excluding oil companies, the operating profit rose double-digit at 12.13 per cent and net profit at a healthy 24.21 per cent.

The 15.62 per cent rise in sales for 1,700 companies has been the lowest in the current financial year. Sales growth was higher by 19 per cent during the September 2005 quarter and 15.85 per cent in the June quarter. The sales growth rate for oil companies fell to 16.6 per cent from 27.9 per cent in the September quarter and 21.1 per cent in the June quarter.

The China story for steel companies seems to be finally over. After several quarters of growth in sales and profits, the sales of integrated steel firms declined by 6.01 per cent and net profit by 34.5 per cent. Their operating profit margins were lower by 800 basis points to 22.34 per cent.

The major sectors that witnessed a downturn in the sales growth rate during the quarter were oil exploration and allied services, trading, fertilisers, diversified companies, auto ancillaries, lubricants, automobiles and manmade fibers.

The sales growth rate continued to be higher for power, software, pharmaceuticals, telecom, aluminium, metals, sugar, engineering, capital goods and construction.

Refineries, telecom equipment, lubricant, pig iron and carbon black manufacturers collectively fell into the red while steel, textiles, shipping, packaging, entertainment, fertilisers, aluminium and diversified companies posted decline in profits.

Hotels, textiles, cement products, soda ash, steel (medium and small), abrasives and grinding wheels, cement, computer software, construction, transmission line towers, metal, ceramics, diamond and jewellery, and engineering and construction have posted robust profit growth.