Manufacturing firms see decline in operating profit for second qtr in a row

The operating profit for manufacturing firms is down 18.4% year-on-year, according to CMIE

Manufacturing companies earned less money from their core business in the September 2024 quarter than in the same period last year.

 

In fact, the operating profit for these entities is down 18.4 per cent year-on-year, according to data from tracker Centre for Monitoring Indian Economy (CMIE), which looked at the results of manufacturing companies from a sample of 1,740 companies with data available as of the September quarter. 

 

Operating profit is profits before depreciation, interest, tax, and amortisation – net of prior period and extraordinary transactions, other income, and income from financial services. The fall is worse than the 8.8 per cent decline seen in the June quarter. Analysts believe a revival may take some time, amid adverse growth indications.

 

PMI at 11-month low

 

A key index of manufacturing activity, the HSBC India Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, declined to an 11-month low in November, according to data released on December 2. Economic growth slowed to a seven-quarter low of 5.4 per cent, amid a manufacturing slowdown, according to government data released on November 29.

 

The analysis of CMIE data shows that the latest quarter has been weaker than most quarters in data going back to December 2009. There are only five quarters which have seen a worse year-on-year performance than the latest figures. This includes pandemic-affected quarters, such as March 2020 (-47.4 per cent), June 2020 (-42.9 per cent), and the September 2022 quarter (-28.5 per cent). There have also been declines in 2011 and 2012 (Chart 1).

 

Manufacturing companies are doing worse than other sectors. Non-financial sector companies, of which manufacturing forms a part, have seen an 8.4 per cent year-on-year decline in operating profits. This is less than half the fall seen in manufacturing.

 

Petroleum and petroleum products are among the worst-performing. This is followed by sectors such as cement, and metals (Chart 2). Petroleum products have been a major contributor to the decline.

 

The manufacturing segment has seen a marginal growth of 2.56 per cent if one excludes petroleum. Though this is still slower than the 3.4 per cent growth seen for the non-financial sector as a whole after excluding petroleum. 

 

 Price fall

 

A fall in prices resulting in lower realisations may have played a role in the poor performance of the petro products segment, according to Deepak Jasani, head of retail research at HDFC Securities. Cement companies have been affected by lower government spending and weaker demand in rural areas. 

 

There may not be a strong revival in the December quarter either. “In October and November, the initial indications are that they are not unusually good this time around, December, we are watching closely,” says Jasani.

 

Kapil Gupta, Executive Director-Research, Nuvama Institutional Equities, says that after a sharp bounce following the pandemic, the economy is settling into a lower range for growth amid limited demand growth and lower government spending. He adds that a revival may take some time to play out amid an uncertain global environment for exports. Policy support may help the domestic demand situation, though a turnaround will not be immediate.

 

“It is a few quarters away,” says Gupta. A key positive has been the 17.3 per cent year-on-year growth in exports for October. The persistence of this trend can help growth, though uncertainty remains amid talk of rising tariffs, he adds.

 

Besides exports and government spending, Jasani says, a revival in manufacturing fortunes will depend on higher incomes and consumption, especially in rural areas.