Corporate Net Profits Dip 2%

The consolidated results of 1,000 companies show a decline in net profit by two per cent though the turnover has improved by 16 per cent. The profitability, too, is under squeeze. Operating profit margins on sales declined by about one per cent while gross and net profit margins declined by over one percentage point.

While sales moved up by 16.4 per cent, operating profit could not keep pace at 12.2 per cent, thanks to a 17 per cent rise in production cost which could not be fully passed on to the consumer. As a result, operating profit margins fell to 17 per cent in the first half of current year from 17.6 per cent last year.

 

Interest charges -- higher by over 30 per cent -- have done most of the damage. Thus the high cost of funds was consequent to a lower growth in gross profits which moved up only 6.5 per cent. Given the inflation rate of 6 to 7 per cent during the past one year, the gross profit growth in real terms can be termed negative. This is reflected in the sharp fall in gross profit margins from 13.5 per cent in the first half of last year to 12.3 per cent this year.

It seems that many companies (in this sample) have provided for higher depreciation to avoid part of their profit being in the MAT net. A 19 per cent rise in depreciation charges could be the result of spending large amounts on asset formation to show a good growth when demand revives.

The poor performance of many companies has resulted in a 15.7 per cent rise in the provision for tax. Yet, the effect of minimum alternate tax is well reflected in the tax provision made by the tax-paying companies. Tax provision as a percentage of profit before tax of these companies increased to 26.8 per cent from 23.4 per cent in the previous year. Besides, as many as 374 companies which reported a net profit of Rs 2609 crore have not made any tax provision. And about 133 companies have made a lower tax provision owing to poor performance.

Thus, the 1,000 corporates have reported a negative growth in net profit after a nifty growth year of 1994-95 and a moderate 1995-96. A negative growth of 2 per cent in net profit can prove to be the tip of an iceberg as more results follow.

Moreover, had the 374 companies provided a minimum tax of Rs 336 crore at the rate of 12.9 per cent, the decline in net profit would have been over 5 per cent.

For corporates it seems to be a repeat of 1992-93 when they had reported a net profit growth of about 6 per cent. After this poor performance, they made a sharp turnaround through a booming stockmarket, which gave them cheap money to expand, and the interest cut bonanza by the Reserve Bank of India.

But this time the scene is different: the stockmarket is in a bad shape, money supply is tight and a severe recession is gripping corporates. It is feared that the second half of 1996-97 would be equally bad.

Essar Steel, with an interest provision of Rs 171.7 crore, shows the highest increase in interest burden.

Oswal Chemicals, RCF and Lakshmi Machine Works also reported a sharp rise in their interest costs. Siemens reported a sharp decline in gross profit at Rs 2.80 crore compared with 53.4 crore. Mysore Paper Rs 5.63 crore (Rs 33.08 crore) and Snowcem Rs 2.43 crore (Rs 13.91 crore) are among others which have shown a sharp decline in their net profit.

Among the 1,000 companies, 67 showed a sales growth of over 100 per cent while the sales of 226 companies declined. The interest burden of 172 companies was up by over 100 per cent, while 276 companies managed there resources well to show a fall in the cost of funds.

The gross profit of 89 companies zoomed by over 100 per cent while 302 reported a negative growth.

The net profit of 87 companies rose by over 100 per cent while 342 reported a decline.