Statsguru: 6 June 2011

The results for the quarter ended March 2011 of 2,305 manufacturing and services companies point to a slowdown in India Inc’s earnings growth. However, the performance is also influenced by one-offs and the poor performance of public sector oil companies.

Barring the blip in the June 2010 quarter, India Inc has posted its lowest profit growth in the last six quarters. Among the key culprits is raw material cost, which has risen 25.5 per cent year-on-year in the March 2011 quarter, reducing margins of the 2,305 companies by 70 basis points. The private sector has done relatively better with operating profit margins down just 57 basis points vis-a-vis 92 basis points for the public sector companies. (Click here for graphs)

The sectors that saw margin pressure include auto, realty, steel, mining and FMCG. Though pharma sector profits were also down, it was largely due to a swing in the performance of four or five companies like Wockhardt, Ranbaxy and GlaxoSmithkline Pharma.

The spike in raw material costs pushed many companies to increase product prices. Though many haven’t passed it on fully to customers, leading to lower margins, the increase in prices is also partly responsible for sales growth looking robust (for some), which is the highest in the last four quarters. Consider this. Average Brent crude oil prices were 37 per cent higher in the March 2011 quarter at $105.21 a barrel compared to the year-ago period. This boosted sales growth of the refineries sector, which accounts for almost 30 per cent of the aggregate sales and nearly 21 per cent of net profit of the 2,305 companies . But thanks to the increase in subsidy sharing by ONGC and OMCs, the sector's profit growth was impacted.

Among other sectors telecom, IT and textiles reported over 20 per cent rise in sales growth, though competitive pressures and interest costs hurt profitability. Similarly, a majority of auto companies saw their margins slip.

Going ahead, the margin and earnings outlook for India Inc isn’t looking good. With input costs still firm, economic growth slowing, rising interest rates and uncertainties in global markets, experts believe the going will not be smooth at least for the next one or two quarters.