Disquieting decline in India Inc's sales, profit

A review of 2,561 companies that have released results for the third quarter (Q3) of 2015-16 makes for depressing reading. Net sales are down, profits after tax are down, and operating profits are flat. Taking all the companies together, net sales have dropped by 4.4 per cent year-on year (y-o-y) while total income has dropped by 0.1 per cent y-o-y. Operating profits (profits before interest, depreciation, amortisation and taxes, or PBDIT) have grown just 0.9 per cent. Net profits (Profits After Tax or PAT) have shrunk 1.7 per cent. These results are computed upon a low base. Net profits in the corresponding quarter last year for the same sample fell by 11.4 per cent y-o-y, while sales grew only 1.5 per cent. So the slowdown is more disquieting. Raw material costs have dropped by 18.9 per cent, while power and fuel costs are down by 5.7 per cent. However, employee costs are up 9.2 per cent. Operating margins (PBDIT to sales) have deteriorated a little, standing at 22 per cent y-o-y for Q3, versus 22.5 per cent y-o-y for Q2, 2015-16.

Excluding the financial sector and oil & gas, the database contains 2,100 companies with lacklustre results. Net sales for the 2,100-sample ex-energy and ex-financials have expanded 0.7 per cent - the slowest growth in three years. The sharp drop in crude oil pulled down sales even more for the whole sample. PBDIT is up just 1.7 per cent for the 2,100 sample. Net profit after tax is up 3.3 per cent for the 2,100-sample. The overall drawdown in net profits is due to the financial sector which has seen PAT fall by an extraordinary 40 per cent - mainly because PSU banks have been impacted by higher provisioning for their non-performing assets. Power, information technology services, pharmaceuticals and automobiles were the biggest contributor to corporate profitability and growth during the quarter. The worst laggards were those in metals, mining, construction, infrastructure and capital goods sectors.

Looking at the sample of 2,100, some other points stand out. Employee costs are up by 8.6 per cent for the 2,100 companies, and up by 9.2 per cent for the entire sample. The labour market is tightening all round. Interest costs have risen by four per cent - a lower growth rate than the past three years. But it may still indicate a stressed credit cycle, given that net sales are flat and other costs are down. Operating margins are at 14.3 per cent for the 2,100 companies. Depreciation as well as amortisation is low at 4.9 per cent. This is in line with trends of single-digit depreciation for the last four quarters and it indicates persistently low investment. Interest coverage ratios (ICR) or the ratios of operating profits to interest costs were flat in Q3. The ICR for these 2,100 firms was at 4.2 - down from an averaged 4.4 across the four quarters of 2014-15.

While there was no apparent deterioration in results outside the financial sector, a combination of sales stagnation and flat margins is evident. Investment remains down. The Budget will have to grapple with the twin imperatives of raising investment and reviving demand.