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India Inc performed creditably despite the rising cost of inputs in the first quarter of this financial year. Riding on a six-year-high net sales increase of 27.48 per cent, companies reported a 21.46 per cent growth in net profit.
If one excludes the oil companies from the pack, the net profit growth is even stronger at 27.67 per cent though net sales growth is marginally lower at 25.21 per cent.
However, operating margins of corporate India, including oil companies, declined by 70 basis points, while that of non-oil companies increased by 22 basis points. In other words, oil companies' margins have shrunk much sharper than the rest of the pack. One basis point is one hundredth of a percentage point.
A much sharper fall in operating margins has been arrested by 983 companies that have outperformed the corporate sector by posting a net profit growth of over 21.46 per cent.
These 983 companies recorded 223 basis points jump in operating margins. For 1,504 underperforming firms, margins declined by 288 basis points.
The 'BS Research Bureau' survey covers 2,487 firms in manufacturing, services and banking and financial sectors.
The interest cost for manufacturing companies rose for the third quarter in a row and the third time in the last 20 quarters. For the quarter ended June 2006, their interest cost went up sharply by 26.47 per cent.
On an aggregate basis, interest cost for the manufacturing sector rose by 26.47 per cent -- the fastest quarterly growth since June 1998 when corporate India started reporting quarterly earnings. Excluding the oil sector, the growth is slightly lower at 23.58 per cent.
The interest cost for corporations had been falling since March 2001, but the trend was reversed last year. It went up by 12.91 per cent in the quarter ended December 2005, the first time since March 2001.
For the quarter ended March 2006, the rise in interest cost was 9.47 per cent. Analysts said interest cost would go up further with the Reserve Bank of India raising its short-term policy rate to 6 per cent from 4 per cent two years ago and the yield on the 10- year benchmark government security hovering around 8.30 per cent.
The sectors which were hurt by the rising interest cost include capital goods, auto ancillaries, petrochemicals, engineering, housing and construction.
Despite the sharp rise in interest cost, interest to sales at 1.64 per cent has been marginally higher - by 2 basis points - compared to 1.62 per cent during the quarter ended June 2005. However, it is still down 30 basis points from the level of 1.94 per cent in the quarter ended September 2004.
The crucial factor in the performance analysis of corporate India was the results of 40 companies that have posted 55.73 per cent growth in net profit on the back of 41.8 per cent rise in net sales.
These companies include Hindustan Copper (net profit up 490.54 per cent), National Aluminium (up 121.81 per cent), NMD ( up 102.48 per cent), ACC ( up 184.74 per cent) and Gujarat Ambuja Cement (up 109.33 per cent).
At the sectoral level, information technologies, telecommunication, capital goods, cement, metals, sugar, steel products and hotels put up a stellar show. The list of laggards includes refineries, fertilisers, construction, entertainment and steel.
Banks, chemicals and automobile sectors have posted single-digit growth in net profits, while personal care, power and pharmaceuticals sectors have underperformed as against the overall corporate India's performance.
The revenue growth for a common sample of 1,876 companies rose to a six-year high of 28 per cent year-on-year. Oil companies posted YoY sales growth of 32.82 per cent and non-oil companies 25.21 per cent.
Analysts attributed the six-year-high sales growth to strong domestic demand and the VAT (value-added tax) effect. Sales during the quarter ended June 2005 was depressed owing to the implementation of VAT.
The sectors that contributed most to the sales growth rate of the corporate sector are metals (net sales up 98.25 per cent), IT (up 41.51 per cent), cement (up 36.35 per cent) and capital goods (up 37.73 per cent).
The laggard sectors in sales growth are shipping (up 2.92 per cent), steel (up 17.66 per cent), banks (up 19.05 per cent) and engineering (up 16.65 per cent).
Going forward, analysts at UBS Investment Research expect that there would be a possible slump in domestic consumption demand on the back of rising interest rates and inflation. Commodity prices may decline even as concerns about oversupply are rising.
With inputs from Deepak Korgaonkar and Ashok Divase
