Early birds signal rough weather

Sales, profits of 212 firms under pressure in the fourth quarter.

Early fourth-quarter results suggest that India Inc is still under pressure, with the net profit for a sample of 212 companies (excluding banks and financial services firms) falling about 12 per cent year-on-year.

That’s not surprising since sales have slipped, the first quarterly fall in 2008-09, just under 5 per cent, and though raw material costs appear to have come down, money remains costly. Also, foreign exchange losses from currency fluctuations have hurt profits of several firms such as Maruti Suzuki and Ranbaxy (which took a big hit of over Rs 700 crore).

Ranbaxy, in fact, had a particularly bad quarter, with sales falling 4 per cent. But the bigger fall in revenues — 24 per cent — was reported by Reliance Industries (RIL), India’s largest company by market capitalisation. Even where the top line has grown — Cipla, for instance, saw a 14 per cent sales growth — the numbers have been disappointing, given that the rupee has depreciated significantly.

An anaemic top line has left operating profit margins (OPM) lower — down 60 basis points — though raw material cost pressures have subsided. However, other costs haven’t eased as much.

RIL’s operating margin was impacted by lower gross refining margins of $9.9 per barrel. If the fall in net profits has been higher than operating profit, it’s because outflows on interest remain high and there is little other income to support the bottom line. Pantaloon Retail’s interest costs have doubled, leaving its net profit up just 7 per cent year-on-year.

The Street appears to think the worst is over — the BSE Sensex closed at a six-month high last Friday. That’s confusing, given that most CEOs don’t seem convinced they’re out of the trough. IT firms have been more circumspect — Infosys has communicated to the Street that its operating margins could fall 300 basis points this fiscal and Ranbaxy has indicated that sales in 2009 will be lower in rupee terms than last year.
 

STILL SHAKY (How India Inc fared in Q4)
Rs crore	Quarter ended
	Mar-08	Mar-09	% Chng
Sales	116,039.09	112,494.70	-4.75
Other income	2,264.21	2,201.08	-7.56
Operating profit	21,007.68	19,647.49	-6.47
Interest	2,043.21	3,055.71	41.01
Gross profit	22,555.03	20,464.46	-9.85
Net profit	14,782.27	13,167.71	-11.69
OPM (%)	18.10	17.47
GPM (%)	19.44	18.19
NPM (%)	12.74	11.71
No of cos 212, excluding banks and financials Source: BSRB

The HDFC Bank management’s expectations of credit growth for the banking system at just 17 to 18 per cent in the current year indicate there’s unlikely to be a sharp rise in spending, even on the not-so-high base of 2008-09. The Maruti management said the year ahead could be a difficult one. Analysts seem to agree; most feel the momentum in car sales in the March 2009 quarter is unlikely to continue.

Almost all leading brokerages have downgraded Reliance Industries. CLSA says news flow from the exploration front may be more muted than anticipated and that there are few catalysts for a target price upgrade.

The star of the early birds is undoubtedly Hero Honda, with an operating margin of over 14 per cent. It’s probably the only stock to have been upgraded.