News: India Inc’s profit growth is slowing

(DNA 29/05/2006) Mumbai - The stockmarkets may have got the shivers last week, but the latest tally of India Inc’s results shows that corporate fundamentals are fairly sound.

A study of the annual financial results of 1,220 non-financial companies in 2005-06 shows that net sales have grown by a healthy 18.8% to an aggregate of Rs 7,75,314 crore. And even though total expenditure has grown faster at 19.7%, net profits rose by a robust 21.9%.

But there is one good reason for equity analysts to look at the recent results with some concern. When one compares results over a longer timeframe, the deceleration in profits is obvious.

In a separate sample of 990 manufacturing companies (a sub-set of the larger 1,220 companies sampled in the main study by DNA Money), net sales show a dip in 2005-06 after consistent growth from 2001-02 to 2004-05.

Equally worrisome, while net profits grew at a hefty 40%-plus rate upto 2004-05, in 2005-06 it is down to 16.1%. The bears weren’t entirely wrong in pushing stock prices to saner levels.

But the important thing is profits continue to grow despite cost pressures. So where did the higher net profits come from in 2005-06?

One obvious area is lower interest costs, which grew at just 3.6% in our larger sample of 1,220 companies. Another area could be taxes, where the growth of 14.6% is lower than the change in net sales.

The faster growth in expenditure has impacted operating margins, which fell from 16.8 % in 2004-05 to 16.3% in 2005-06, but margins at the net level are slightly better due to lower taxes at 8.2% (versus 8% earlier).

The aggregates hide more than they reveal, and the real performance of these 1,220 companies has been more uneven.

Broadly speaking, the sectors which outperformed in terms of net profits were cement (686%), electrical equipment (130.9%), construction (100.7%), mining & minerals (84.7%), textiles (76%), sugar, aluminium, computers, and telecommunications - among others. The laggards were steel (-20%), diversified companies (-15.9%) and refineries (-2.4%).

Interesting differences are also cropping up in terms of profitability among companies of varying sizes.

In the 1,220 company sample chosen by DNA Money, net sales growth shows more or less the same change (an average of 18%) for large (sales above Rs 1,000 crore), medium (Rs 250-1,000 crore) and small companies (below Rs 250 crore). But when it comes to profit performance, the smaller companies are doing much better.

Stands to reason, since growth is on a smaller base. Thus, while large companies reported a 18.1% growth in net profits, medium companies showed 31.6% growth. Small companies’ profits soared 179.3% rise.

Coming to specific companies, the largest profit growth was registered by Bharti Airtel (67.4%). The worst profit drop - unsurprisingly - was reported by the oil companies, with IBP plumbing the depths (-79.7%).

Most of the remaining loss leaders were also refining or marketing companies. With the government still dilly-dallying on letting them charge market-related prices for petro-products, that situations may not change anytime soon.