Liquidity Crunch Takes Toll Of Corporate Results

The corporate sector's performance in 1996-97 is set to take a severe beating, with a study of 87 results announced till last week indicating only a marginal increase in aggregate sales and a sharp decline in gross as well as net profits.

The 87 companies studied achieved a modest 7.4 per cent rise in cumulative sales turnover in 1996-97. Considering that inflation in 1996-97 also hovered at around the same figure, the sales of these companies remained stagnant in real terms.

The aggregate gross profit of the companies declined by 1.6 per cent, while net profit plunged by 8.3 per cent in 1996-97 over the previous year. Experts say that this 8.3 per cent fall in net profit is only the proverbial tip of the iceberg as higher provisions for the minimum alternate tax (MAT) and depreciation are expected to further squeeze net profit.

 

The study also shows that the corporate sector had to suffer from higher cost of borrowing in 1996-97. Against an interest burden of Rs 1,987 crore in 1995-96, these companies had to pay Rs 2,461 crore in 1996-97 by way of interest, an increase of 23.3 per cent.

An interesting aspect of the results of these 87 companies is that their performance in the second half of 1996-97 was far worse than in the first half. For instance, these companies reported a 10.5 per cent rise in their sales turnover in the first half of 1996-97. But in the second half of the year, the growth in sales turnover for these companies declined to 4.8 per cent, resulting in an annual growth of 7.4 per cent.

A similar trend prevailed in the case of net profit and gross profit. In the first half of 1996-97, these 87 companies recorded a rise of 1.4 per cent in their gross profit and a marginal fall of 1.3 per cent in their net profit. But in the second half, the gross profit declined by four per cent while net profit fell by a higher margin of 13.9 per cent.

Experts point out that the corporate sector's 1996-97 performance may be even worse than that witnessed in 1992-93, when its gross profit increased by five per cent and net profit was up by only three per cent.

The severe liquidity crunch was one of the major factors responsible for the corporate sector's poor performance in 1996-97. Non-availability of credit at lower rates, and a bearish primary market compelled most corporates to postpone growth plans. This also triggered a recessionary trend in the economy, which is indicated by a marginal 4 per cent growth in production and despatches of

Industries which suffered an acute fall in demand were cement, yarn, aluminium, automobile fertilisers, petrochemicals, electrical, chemicals paper, shipping and textiles.

While aggregate sales of these 87 companies during the year ended March 1997 moved up by 7.4 per cent, their operating profit could not keep pace at 4.5 per cent as the cost of production rose by over 8 per cent.

Operating profit margins fell to 20 per cent from 20.5 per cent in the previous year. The higher cost of borrowing at 23.3 per cent also ate into the margins at gross level. Gross profit margin declined to 14.3 per cent from 15.6 per cent, resulting in a 1.6 per cent decline in gross profit.

MAT made matters worse for these companies. With 33 zero-tax companies of 1995-96 paying income tax in 1996-97, the income tax burden of the sample companies was up by 11 per cent. As a result, the aggregate net profit of the sample companies declined by 8.3 per cent.