September quarter show: Net profit of companies fall for 3rd time as non-operating costs go up

September quarter earnings have proven to be a mixed bag for companies. Companies at the aggregate level posted steady operating profit from the year earlier and a sales increase of 11.6%, the highest in four quarters but net profit fell 2.3%, the third drop in a row, reflecting rising pressure of non-operating costs on the bottom line.

  The ET Intelligence Group's analysis of the quarterly results of more than 1,800 companies, excluding banking and finance and oil and gas firms, shows that although operating margin was retained in a tight band, momentum in revenue did not result in higher net profit.

This was largely because the bulk of the revenue growth was on account of a robust performance by select sectors, including IT and pharmaceuticals, which benefited from the favourable impact of a weak rupee on export revenue.

The quarterly performance is in line with ETIG's estimate of the performance of Nifty companies published in ET's October 3 edition. That had predicted a 9% jump in net sales and 3.5% drop in net profit for the 50 large and most frequently traded companies.

Operating margin before depreciation and other income marginally improved by 20 basis points to 15.8% from the year ago. A basis point is one-hundredth of a percentage point. Companies have been able to keep the margin in the range of 14-16% over the past nine quarters, reflecting tight cost control amid slower top line growth and an inability to pass on higher raw material costs. 

Sustaining profitability may become difficult, analysts said. "Cost pressure is visible across sectors. For instance, the cement sector was worst hit during the quarter. Levers for protecting margins will be difficult since raising prices will impact volumes as is being seen in auto and FMCG (fastmoving consumer goods)," said Rakesh Tarway, vice president, equity strategy and product, Motilal Oswal Securities

Barring export-oriented sectors, the outlook across the board isn't too optimistic as the domestic economy hasn't yet shown signs of revival from the decade-low 5% growth in the last fiscal year. To be sure, finance minister P Chidambaram has pointed to favourable economic data including higher core sector growth, rising exports and a likely bumper harvest from a good monsoon that could perk up growth in the second half of the year.

  Although an immediate turnaround isn't likely, Indian companies may not be far from the bottom, some analysts said. "While it's difficult to say precisely if this quarter marked the bottom of this downtrend or not, it looks incrementally likely a bottom may not be too far off," said Mehta of Ambit. "More importantly, analyst estimates have likely troughed and that is what matters more for market direction." However, things still look gloomy for now. "We see pressure across sectors. 

Infrastructure and metal players are facing a slack in demand. Order books need to increase and it would take at least two quarters to reflect that in the top line. But we are not seeing that happen soon," said P Phani Sekhar, fund manager, portfolio management services, Angel Broking. Reduced demand has hurt traditional defensive sectors. "Volumes are not picking up for FMCG. They are stuck at 8-9% growth, which means margin pressure will continue," said Sekhar.

Source- Economic Times

By Muntazir alam

1st Sem PGDM

IIMT College of Management

Greater Noida. UP