• Investment World
• eWorld
• Catalyst
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Sowmya Krishnan

THE bottomline of the fifty companies forming the S&P CNX Nifty Index recorded a decent 15 per cent growth, despite flat sales. Profit after interest, but before deducting depreciation, tax and provision, grew over 11 per cent and the aggregate net profit 15 per cent.

Despite higher provision for deferred tax liability, the aggregate rise in net profit can be attributed to the contribution of `extraordinary' or `one-time' items'.

The aggregate `one-time' income for Nifty companies exceeded Rs 60 crore compared to an outgo of Rs 247 crore in the corresponding previous period.

Excluding this contribution, the net profits would have actually gone up only by 9 per cent. For instance, the `one-time' income of Rs 72 crore has skewed Ranbaxy's net profit by 68 per cent.

Depreciation: The depreciation charge did not show any sign of fresh investments. The aggregate depreciation for Nifty companies went up only by around 12 per cent. A depreciation charge for Reliance Industries and Reliance Petroleum was significantly higher by around 24 per cent and 28 per cent respectively. But this was only because of a change in the method of calculating depreciation on assets in Jamnagar from straight-line to written-down value method. But for the change, the profit at the net level would have been higher by Rs 57 crore for Reliance Industries.

Deferred tax increases incidence: The tax liability of most companies was higher for the July-September 2001 quarter over the corresponding previous quarter due to change in accounting policy for deferred tax. According to the new accounting standard, companies are required to account for deferred tax. Deferred tax liability arises due to the difference in calculating depreciation for tax and accounting purposes.

As a result, companies with heavy fixed investments would be entitled to higher depreciation, reducing their tax incidence. The new requirement evens out this difference. This has resulted in higher tax incidence for companies such as ACC, Gujarat Ambuja and Bajaj Auto whereas for HDFC, tax was lower by around Rs 4 crore due to deferred tax asset.

Another factor is that provisions provided by companies in the banking sector jumped by over 55 per cent in the July-September 2001 quarter. Concerns due to high NPA levels in banks have prompted most of them to maintain higher provision for bad debts.

Mixed picture at the net level: At the net level, the performance of companies such as BHEL, Dr Reddy's Laboratories, Indian Hotels, Larsen and Toubro and Tata Power is noteworthy. On the other hand, that of NIIT, Tata Engineering, Tata Steel, Mahindra and Mahindra and ACC was not impressive.

The profitability projected by the Nifty companies was primarily due to other factors such as higher `other income', extraordinary items, control over financial and operating costs, etc. In the long run, the performance of these companies would improve only if the prime profitability driver — sales — improves.

Going by the general economic indicators, a pick-up in demand is unlikely in the medium term — next two quarters — except in the cement sector.

Considering the magnitude of cost-cutting undertaken in the last one-two years, the scope for further cost-reduction would also be limited.

herefore, in the absence of good topline growth, sustaining a decent bottomline would be an uphill task for the Nifty companies.

Send this article to Friends by E-Mail

Stories in this Section
Forbes Gokak: Accept the higher priced options on last date

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line