Lower pricing power, high input cost hit small biz

Small and medium enterprises (SMEs), with annual net sales below Rs 725 crore, underperformed the corporate sector in the March quarter, with slower growth in net sales and four per cent rise in net profit.

SMEs were hit by lower pricing power and significant rise in input and borrowing costs. This was a consecutive quarter of single-digit growth in profit for SMEs.

The profit growth rate was significantly higher at 26 per cent in the September 2010 quarter and 17 per cent in the June 2010 quarter.

SMEs accounted for 15 per cent of the total sales of 2,100 non-oil & gas and finance companies. They accounted for 9.7 per cent of the corporate sector’s profit and reported significant hardening in the cost of borrowing.
 

THE SME STORY Quarterly growth rate in sales and net profit
	Year-on-year rise in net sales
Quarter ended	Total 3,050	Top 85% *	SME**
11-Mar	21.61	18.90	19.08
10-Dec	18.45	18.13	19.37
10-Sep	21.47	17.92	18.08
10-Jun	22.42	17.79	18.89
FY 2010-11	20.94	18.22	18.87
Year-on-year rise in net profit

11-Mar9.9517.993.91 10-Dec19.467.402.00 10-Sep43.2636.1025.57 10-Jun-9.942.5116.60 FY 2010-1115.1716.0311.72 * Ex-oil and finance companies accounting for 85% of net sales of total sample
** Ex-oil and finance companies accounting for 85-100% net sales

The interest cost moved up considerably by 37 per cent in the quarter from 23 per cent in the December quarter and a modest 10 per cent in the September and June quarters. The cost of raw materials remained higher by 250-350 basis points over net sales in the three quarters.

Of the 1,557 SMEs studied here, 783 firms have reported net profit in all eight quarters, recorded net profit growth of 13.6 per cent in the March 2011 quarter, down from 18-19 per cent in the June and September quarters.

The net profit growth rate was around 12 per cent in the December quarter. As many as 385 companies had reported net loss, compared to that reported by 250 companies in the three preceding quarters.

The operating margins from sale of products declined to 8.34 per cent from over 10 per cent in all previous three quarters. The corporate sector as a whole, including oil and gas, banks and finance, manufacturing and services companies, reported decline in net profit growth rate to around 10 per cent from a robust 22.7 per cent in the previous two quarters.

The strong outperformance has come from non-oil giants, with net profit growth of 18 per cent, up from 7.4 per cent in the December quarter. 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 was seen in sectors such as steel, pharmaceuticals, cement, fast-moving consumer goods, power, oil drilling, gems & jewellery, alcohol and realty. Of the 63 sectors studied here, as many as 12 have reported net sales growth of over 25 per cent in the fourth quarter.

Auto ancillaries did well on the revenue front but their profit growth rate came down to below 50 per cent from over 100 per cent in the three preceding quarters. The rise in input cost continues to haunt the sector, but the rising cost of borrowing, up 24 per cent, has started eating net profit.

Steel companies reported a decent 22 per cent rise in net sales, but net profit declined by seven per cent, as the cost of raw material moved at a higher pace of 26 per cent, while interest burden increased 41 per cent.