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Q1FY12 - Accelerating sales but slowing profits

| 8/29/2011 6:21 PM Monday

From the US downgrade, to the renewed concerns of a double-dip recession and the Euro-zone worries still rearing their heads, global markets have been in a tizzy throughout August. Add to this the Anna Hazare-led civil uprising on the domestic front, and the picture turns out to be positively turbulent, with uncertainty throughout. With so many events to munch on, the June quarter results season actually looks like it has been largely ignored by investors. All said and done, with some normalcy seen in the markets post the mayhem, investors would now be picking up the bits and pieces to figure out where they stand, and here is where the quarterly results will play a significant role. Now that the results season has ended, it’s time to get back to the drawing board to get a clear picture of how India Inc. has performed and what to expect going forward.

Of the total results of 3619 companies that we have analysed so far, India Inc. yet again gave a pleasant surprise, with a better than expected topline growth of over 26 per cent on a YoY basis. This comes as a surprise, considering that the growth has actually come on a higher base of June 2010, when sales grew by 20 per cent. However, before we can savour this moment with a relieved smile, a quick look at the bottomline numbers takes the wind out of our sails. With a bottomline growth of a mere five per cent during the same period, this is certainly not the start that India Inc. would have asked for in FY12. This gives a rather mixed feeling of joy and sorrow at the same time, and the focus suddenly shifts to gauging what went wrong. While there was an anticipation of a slower June quarter on the bottomline front, the profit growth was worse than expected. However, the eternal optimists that we are, we went ahead and cleared out the usual aberrations of PSU oil marketing companies and extraordinary items. However, even adjusting for these, the picture doesn’t change much. While topline growth stands at over 23 per cent, the bottomline improves a percentage point further to almost six per cent. While many might conclude that these results are in line with street expectations, we feel otherwise, and the June quarter results indeed look to be extreme, both in terms of sales and profits.

While there is no doubt that the results are indeed disappointing on the bottomline front, we remain pleased with the topline growth. Now, this indicates a few things worth noting. First and foremost, the strong sales numbers for the June 2011 quarter, which are already on a higher base, ratify that this is a strong consumption led growth, and the overall demand situation seems to remain robust as of now. Evidently, producers still have the pricing power, and they have managed to pass on some costs to the end customers, and have taken the balance hit onto themselves to avoid dampening the demand.

However, what continues to be a wet blanket are rising input costs. It may be noted that raw material costs have shot up by 28.40 per cent, while power and fuel costs are up by 20 per cent. To make matters worse, the interest cost (ex-bank and financial institutions) has also gone up by 20 per cent to Rs 3239 crore, while depreciation and tax outgo are up by 12 per cent and 14 per cent, respectively. These factors have combined to increase India Inc.’s uneasiness further, thus impacting bottomline growth.

What is even worse than a slower bottomline growth is that India Inc. is losing steam, and that too on both, the topline as well as the bottomline. In Q1 FY12, for every two companies whose sales have gone up, one company’s sales have declined. In fact, this ratio has actually worsened over the same quarter last year, when it was at 3:1. Similarly, on the profit front too, for every one company whose profit has gone up in Q1 FY12, one company has declined. This ratio too has worsened from 1.6:1 during the same quarter last year. In Q1 FY11, about 36 per cent of companies’ profits had declined; this rate has increased to 44 per cent in Q1 FY12. The number of companies posting losses has increased by 16 per cent in Q1 FY12 to touch 925, from 794 in Q1 FY11. This certainly doesn’t paint a pretty picture.

 

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