Operating margins improve, but sales still sluggish
If morning shows the day, India Inc has something to cheer about. The operating margins of the early birds — 118 companies that have declared their first quarter results so far — improved sharply, backed by a healthy increase in net profit.
However, the single-digit growth in revenue raises big questions about a sustained recovery. That’s because demand for engineering, construction, software services and realty remained subdued — one reason as many as 60 of the 118 companies reported a decline in sales and 12 others showed a rise of just 2-8 per cent.
| LIGHT ON THE HORIZON? Q1 performance of 118 early birds | ||
| % growth rate for quarter ended | ||
| June 2008 | June 2009 | |
| Net sales | 29.04 | 7.83 |
| Total expenses | 29.87 | 4.91 |
| Raw materials | 26.43 | -5.24 |
| Interest | 59.95 | 28.23 |
| Net profit | 16.60 | 17.24 |
| OPM % | 15.91 | 17.91 |
| Change in OPM* | -21.00 | 200 |
| Total cost/sales % | 81.92 | 79.71 |
| RM/sales % | 29.81 | 26.20 |
| * Change in basis points over previous year | ||
The encouraging sign is that the operating margins of the early birds went up 17.9 per cent, which is higher by 200 basis points year-on-year and 290 basis points over the sequential quarter. Almost all front-line and mid-size companies led by Larsen & Toubro, TCS, Infosys Technologies, Bajaj Auto, Crompton Greaves, Exide Industries, Kirloskar Brothers and Jubilant Organosys reported a decent increase in margins.
The quarter saw a sharp decline in operating costs, higher price realisation owing to the decline in global commodity prices and greater operational efficiencies and changes in the accounting policy on mark-to-market losses. The 6 per cent appreciation of the rupee helped software companies post gains on hedged export revenue. The total cost of production to sales declined 222 basis points, while the cost of raw material to sales declined 361 basis points.
Net profit went up 17.2 per cent (adjusted for the extraordinary profit of Rs 1,020 crore for Larsen & Toubro on sale of stake in UltraTech Cement), which was marginally higher than the 16.6 per cent rise in the same quarter of the last financial year.
As many as 65 companies reported increase in net profit, with Jubilant Organosys, Infotech Enterprises, VST Industries and JK Tyre reporting over 100 per cent jump.
The early trend indicates that cement, foods processing, electrical equipment, pharmaceuticals and two-wheeler companies will do much better than in previous quarters. Auto ancillaries, engineering and software services firms are, however, likely to be the laggards. L&T did well with a 15 per cent rise in net profit while Crompton Greaves reported 29 per cent rise despite a single digit growth in sales.
Bajaj Auto did well posting 67.6 per cent rise in net profit on almost flat sales. Dhampur Sugar Mills reported net profit of Rs 11.14 crore against net loss of Rs 23.54 crore in the same quarter of last year.
