SMEs' profitability in June quarter hit by rising input cost

Small and medium enterprises (SMEs), with annual net sales below Rs 500 crore, have outperformed the bigger corporate sector in the June quarter, with higher growth in net sales and net profit. However, despite the sales growth rate at 22.7 per cent, the profit growth rate slipped to 14.9 per cent from 197 per cent in the March quarter and 484 per cent in the December 2009 quarter. It is clear that the 24.4 per cent rise in cost of raw materials infected profit growth.

The SMEs, which accounted for barely a 6.5 per cent share in revenue and profit of the corporate sector, have reported a first sign of hardening of cost of borrowing. The interest cost rose significantly by 23 per cent in the June quarter from a marginal 5-6 per cent in the previous three quarters. The impact is seen on sectors such as automobiles, steel, mining, capital goods, power, infrastructure and telecom.

Nevertheless, revenue growth for SMEs has come from automobiles, auto ancillaries, capital goods, construction, engineering, fertilisers, mines, metals and telecom. The sugar sector disappointed as expected, on a 30-40 per cent drop in prices from the peak level. Agro chemicals, cement, edible oil and packaging firms had a slowdown, Cables, dry cell batteries, FMCG, and infrastructure reported disappointing revenue growth.
 

SMALL WONDERS Quarterly growth rate (in per cent)
Classification	9-Sep	9-Dec	10-Mar	10-Jun
NET SALES
Total 1,777 cos	-8.37	13.79	30.02	22.73
SMEs (1,016 cos)	0.21	17.15	23.31	22.70
SMEs (808 cos)*	-0.29	17.03	23.01	24.44
RAW MATERIALS
Total 1,777 cos	-18.49	11.23	40.82	32.61
SMEs (1,016 cos)	-2.02	16.32	22.93	24.42
SMEs (808 cos)*	-2.22	13.86	22.12	25.43
NET PROFIT
Total 1,777 cos	49.84	37.24	14.41	-11.26
SMEs (1,016 cos)	17.16	483.82	197.49	14.92
SMEs (808 cos)*	21.98	LTP	302.34	30.90
* Uses raw materials;  LTP: From loss to profit

On profitability, the textiles sector did well, with firms reporting net losses down from 43 a year earlier to 20 in the quarter under review. The profit of auto ancillaries jumped over 100 per cent, but this growth rate was significantly higher during the previous three quarters. The casting and forgings sector reported net profit in a consecutive quarter, while steel companies reported net losses for the third quarter in a row. Sugar firms are in the red for consecutive quarters.

Of the 1,016 SMEs studied here, 808 firms had a net profit rise of 24.4 per cent, but cost of raw material increased 25.4 per cent. Many firms increased final prices to address cost pressure. For example, textiles, auto ancillaries, mine and minerals, FMCG and engineering could increase product prices, while sugar, cement, power, non-ferrous metals and steel firms failed to do so.

The corporate sector as a whole, including oil and gas, banks and finance, manufacturing and services companies, underperformed SMEs with a 22.7 per cent growth in revenue and a 11.3 per cent decline in net profit during the quarter under review.

The decline in net profit has been higher at 19.4 per cent, excluding the finance sector, indicating severe impact of the oil sector on corporate earnings. The remaining sample did well, with 16.7 per cent growth in sales and 8.3 per cent rise in profit.