India Inc Sees Stagnant Profit Margins

The big picture emerging from the 2001-02 first quarter results is that corporate India has barely managed to hold out. The 1,136 companies, which have declared their quarterly results till today, largely reported single-digit sales growth though their aggregate net profits moved up a healthy 12.7 per cent.

Yet, their profit margins have remained unchanged at 4.6 per cent (as against 4.3 per cent in the same quarter of 2000-01), suggesting that the companies were either unable to step up price realisations or cut costs commensurate with declining sales.

The nearly flat sales growth (accounting for inflation) meant that while corporates were unable to sell more at current prices, they were not even cutting selling prices to push volumes. The latter would have meant a massive dent on the bottomline.

Among the 489 companies which have reported a drop in sales, 55 per cent have registered sales growth rate of less than the full sample average (5.3 per cent). But if the 312 loss making companies are included, the net profits of 66 per cent of companies turn out to be below the industry average. Only 85 companies have reported a turnaround during the quarter.

But by far, the sharpest slowdown is in the information technology sector. As many as 94 small and big companies have reported a modest 18.21 per cent growth in net profit on the back of a 25.47 per cent rise in sales. Of these, 15 companies have registered a net loss (as against only 2 in the previous quarter) while 39 have reported a decline in net profit compared to the previous quarter.

What has saved the corporate sector is the lower growth in interest and depreciation costs.

Interest cost for the full sample increased marginally by 1.45 per cent. With no major new projects coming on stream, the depreciation provision for the quarter ended June 2001 has been 1.1 per cent lower than in the quarter ended June 2000.

There are a few patches of promise however. Sectors like refineries, information technology, shipping , cement and cigarettes are still doing very well. If these were to be excluded from the aggregate picture, the sales of the remaining corporates would move up a marginal four per cent and their profits actually show a decline of 11.22 per cent.

The eight refineries, aided by Reliance Petroleum, registered a sharp 38.53 per cent rise in profit on a modest seven per cent rise in sales turnover. These companies account for 41.87 per cent of the sales and 34.7 per cent share in net profit of the 1,136 companies. The cement sector is back in the black with net profit so far aggregating Rs 205 crore compared to net loss of Rs 5.11 crore in the quarter ended June 2000. Riding a buoyant freight market, the shipping industry has turned in better results with a 33 per cent rise in sales and a 151 per cent rise in net profit.