Margin pressure dents early birds' profit growth rate

The early birds’ performance in the fourth quarter ended March 2011 is more or less in line with expectations, with no surprise elements. Net sales rose 26 per cent but profit rose at a slower 22.7 per cent, as operating margins took a hit by 160 basis points, year on year.

Net sales had increased 14 per cent in the third quarter, largely due to planned shutdown of a crude distillation unit for 22 days by Reliance Industries. The net profit growth rate in the second and third quarter rose 25 per cent each, and in the first quarter by 18 per cent.

Net sales for the 102 early birds rose 26 per cent, led by two refineries —Reliance Industries and Essar Oil — and a software giant, Tata Consultancy Services. Net profit increased 22 per cent, led by four banks and also Essar Oil, TCS and Hindustan Zinc. As mentioned earlier, there was a decline in operating margins by 160 basis points (a bps is one-hundredth of a per cent), as the cost of raw materials rose 130 bps for manufacturing companies in the aggregate. Interest costs were also responsible, rising 17 per cent compared to a rise of less than five per cent in all three preceding quarters.

Continued moderation in market earnings growth in the fourth quarter will not come as a surprise. But the cost pressures and rising interest burden suggest considerable room for surprise at the company level. For example, while Infosys Technologies underperformed the market, TCS and HCL Technologies did extremely wells. The rise in Reliance Industries’ net profit was below expectations due to gross refinery margins (GRMs) being at $9.2 per barrel, lower than expected, due to the impact of a shutdown for 46 days. Essar Oil reported 78 per cent rise in net profit, led by GRM of $8.5 per barrel compared to $5.37 per barrel a year before.