India Inc Reels As Net Profits Slide By An Average 12.7%

Corporate India seems set to witness its worst ever performance in recent times with the results of as many as 600 companies declared till date showing a 12.7 per cent drop in net profit in 1996-97.

The degree of the decline in performance can to some extent be gauged by the fact that in 1995-96, the net profit of 1,000 top companies increased by as much as 22 per cent. Most of the 600 companies, which witnessed a fall in net profit in 1996-97, had shown a rise in profits in 1995-96.

A study conducted by the Business Standard Research Bureau (BSRB) shows that these 600 companies accounted for a total sales turnover of Rs 1,80,000 crore in 1996-97. This turnover, however, represents an increase of only 10.4 per cent over the previous year. After taking the prevailing inflation rate of about 7.87 per cent in 1996-97 into account, the real increase in the sales turnover of these companies appears very marginal.

 

Further confirming the depressed condition of the market, the profitability margins of all these 600 companies came in for a tight squeeze in 1996-97. While the operating margin (operating profit divided by sales) fell by six per cent from 18.3 per cent in 1995-96, to 17.2 in 1996-97, the gross profit margin (gross profit divided by sales) dropped by 12 per cent from 13.8 per cent to 12.1 per cent in the same period. Even the net profit margin (net profit divided by sales) declined by 20 per cent from 8.2 per cent to 6.5 per cent.

A more detailed analysis of the profitability margins of the 600 companies shows an all-round down trend. While 341 companies registered a decline in the operating profit margins, 382 companies showed a fall in gross profit margins and 415 companies saw a drop in net profit margins compared to the previous year.

The study also shows that the market conditions become more adverse for the corporates in the second half of 1996-97. In the first half of last year, the 600 companies covered under the study showed a rise of 3.3 per cent in gross profit and a decline of 3.1 per cent in net profit. But rising input costs and recession affected these companies more adversely in the second half of 1996-97.

Thus, a 12 per cent rise manufacturing cost and a 26.2 per cent rise in the cost of borrowing resulted in a 8.7 per cent decline in gross profit and a steeper 20 per cent fall in net profit in the second half of 1996-97. As a result, the gross and net profits of these 600 companies declined by 3.3 per cent and 12.2 per cent, respectively, for the full year of 1996-97.

What caused further damage was a higher provision for depreciation at 16.1 per cent and MAT of 12.9 per cent. With a marginal rise of only 3.9 per cent in operating profits, interest cover (operative profit divided by interest burden) declined to 3.35 per cent in 1996-97 from 4.1 per cent in 1995-96.

The dismal corporate performance will also affect the government income tax collection in the current year. The tax provision of 600 companies edged up marginally by 1.7 per cent over the previous year. The MAT, however, increased the share of income tax in pre-tax profits to 23.6 per cent in 1996-97 from 21 per cent in the previous year.

A sector-wise analysis indicates wide-spread recession in 1996-97. The trend available for 66 major industries, in which the 600 companies operated, show that sales of 19 industries declined over the previous year. The growth in sales for 12 industries was below 10 per cent while for 22 industries it went up between 10 and 20 per cent. For 14 industries, sales rose by over 20 per cent.

As a results, as many as 37 industries reported a decline in gross profit while four other industries showed a below 10 per cent rise in gross profit. For seven industries gross profit rose between 10 and 20 per cent and for 18 industries gross profit swelled by over 20 per cent. With many more companies coming in the tax bracket, net profit of 43 industries showed a decline over the previous year. The gross profit margin (GPM) of 25 industries moved up while 40 industries reported a declined in GPM.

Among the industries, paper is one of the major industries that fared badly in 1996-97. The available results of paper companies showed a two per cent decline in sales turnover and a sharp 60 per cent decline in gross profit. GPM too declined to 7.8 from a healthy 17.9 per cent in the previous year.

With a severe setback in the second half, the aggregate sales of cement companies stagnated at the previous years level.