Mat Didnt Erode Profits

To find whether this holds good for the giant private companies as well, here we analyse a sample of 50 giant private companies with a sales turnover of more than Rs.100 crore.

Applying the principle of stratified random sampling on 250 giant private companies with sales turnover above Rs.100 crore, 50 sample companies were selected taking sales criteria of the sample for correct representation.

The companies selected were representative of almost all the industrial sectors of the Indian corporate world.

The annual turnover band extended from Rs.137 crore to Rs. 10,097 crore as reflected in the unaudited annual reports of 1996-97.

In assessing the annual performance of some companies, the first half and second half results for 1996-97 were clubbed. In the case of companies with accounting periods of more or less than 12 months in any of the past three years, annualised figures were worked out.

Findings of the study are tentative to the extent that for a large number of companies, audited results for the latest year are not yet available.

Our analysis revealed that the corporate giants showed all round growth in sales, profits and profitability ratios in 1994-95.

After the recession of 1992-93, they renewed their growth significantly in 1993-94 and maintained it with higher speed in 1994-95. However, in 1995-96 and 1996-97, the corporates could not maintain the same tempo of growth.

In fact, the giant companies performed more or less in a similar manner as the overall corporate sector in fiscal 1996-97.

The aggregate sales turnover of the 50 selected companies has increased by 12.84 per cent during 1996-97.

This was lower than the growth rates of 22.81 per cent and 26.7 per cent during 1995-96 and 1994-95 respectively.

Similarly, growth of operating profit decreased to as low as 8 per cent from 26.33 per cent. Profit before tax and net profit registered negative rates of growth in 1996-97.

Much before the announcement of the financial results for 1996-97, some analysts as well as corporate heavyweights had opined that rising interest obligations and introduction of minimum alternative tax (MAT) would result in erosion of corporate margins in 1996-97.

Our analysis reveals that interest burden may be one of the factors which was responsible for the erosion of profit growths in 1996-97, but in no way has the minimum alternate tax influenced that process.

In comparison to the previous year, interest burden of the selected corporates increased by a considerable rate of 26.65 per cent in 1996-97 compared to only 7.64 per cent in the previous year.

So, its quite understandable that Reserve Bank of India has come forward with measures like lowering interest rates in its latest credit policy.

At the same time, the tax burden of the selected companies increased only by 8 per cent compared to nearly 53 per cent in the previous year.

So, it cannot be said that MAT was one of the reasons for plummeting corporate giants bottomlines.

Only eight of the 50 selected companies have increased their net profits during the year 1996-97.

Most of these companies also recorded higher tax burden during the year.

Among these eight companies, Dharamsi Morarji, Balrampur Chini and GIS Ltd. recorded significant increase in their net profit growths inspite of substantial increase in both tax burden and interest costs.