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Srividhya Sivakumar

BL Research Bureau Corporate India managed a strong rebound in net profit for the September quarter, but that wasn’t backed by healthy sales.

Profits expanded mainly because of input cost savings, which lifted margins. An analysis of standalone financials of close to 1,350 companies (excluding banks and other financial institutions) that announced September quarter numbers shows that their total profits grew by a little over 50 per cent, marking a strong recovery from the decline seen in September 2008. Sales however, declined by 8.5 per cent in comparison.

India Inc’s earnings rebound is seemingly on the back of lower raw material prices and improved cost-management. Decline in prices of commodities such as steel and aluminium, even as end-product prices showed a little less downward correction in some sectors, has helped profit margins.

Reduction in excise duties as part of the Government-sponsored stimulus plan too helped in expanding margins in some sectors with companies preferring to keep the savings rather than pass it on to customers.

During the quarter, the operating profit margins expanded by an impressive 5 percentage points to 15.5 per cent, while net profit margins improved to 8.7 per cent from 5.3 per cent last year.

With profits growing strongly, companies now appear better placed to meet their interest obligations.

Interest cover, which reflects the number of times a company’s operating profit covers its interest costs, is now perched at a healthy seven, from the four seen last year.

Growth was a function of size, with larger companies reporting improved profit growth but lower sales. Profit growth at about 67 per cent came in much stronger for large-cap companies (market capitalisation exceeding Rs 8,000 crore), than mid- (14 per cent) and small-cap (23 per cent) companies.

However, the decline in sales, at 12 per cent, was also steeper for the large-cap universe. Large-cap companies also made more progress in bettering their interest cover than smaller ones, suggesting that these small- and mid-sized companies may yet not have had easy access to liquidity.

The numbers continued to show sharp divergence between sectors. While auto and cement companies reported strong sales, led by improved volumes, others such as metals, steel and realty players reported a fall in sales, due mainly to depressed realisations.

In terms of profits, auto and cement posted strong growth, while real estate and construction companies saw a fall.

In what seemed to be another interesting sidelight, commodity producers such as metal and steel companies saw a fall in sales and profits, while commodity users such as capital goods and engineering companies reported growth.

However, on a sequential basis, metal and steel companies have managed to improve their performance. The improvement in commodity prices after the steep fall from last year may explain this trend. Sectors such as pharmaceuticals, consumer goods and auto ancillaries too managed an impressive growth.

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