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Industry: Rising input, interest costs eat into India Inc’s profits |
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Rising input and interest costs seem to have squeezed Corporate India’s profit margins in the last quarter of fiscal 2007-08. Companies have been able to post much higher revenues, but their profits are growing at a significantly lower rate. The net profit of the first 170 companies that disclosed their fourth quarter result as on April 23 has grown by 18.3 per cent compared with a more robust 23.5 per cent for the corresponding period of the previous year. Revenue for these companies grew by a whopping 31.7 per cent, which is up by 10 percentage points over the previous year’s growth figure.
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Low margins despite high volumes
•Figures slightly better than expected
•Escalating costs outpace rising revenue
•Employee costs up due to big salary hikes
•Manufacturing sector profits under considerable pressure
•Cement, auto and auto ancillary industries major sufferers
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According to Mirae Asset Management head of equity Gopal Agrawal, “The results are on expected lines and we expected pressure on profits as a result of the higher base that companies are currently operating at and higher input costs. The cost of funds has also gone up for companies. We are expecting the profit growth for this quarter to be around 16-18 per cent.”
These are in line with the forecasts made for the quarter but are early days for the larger trend on the results, feels SBI Funds Management chief investment officer Sanjay Sinha. “To take a call on the trend of results in the middle of a results season might be misleading at times. Still, by and large the results are on expected lines. In fact, the forecasts made were more sober and the actual figures are better than those expectations.”
As far as the rise in revenue growth is concerned, the higher input costs and price pressures have resulted in higher realisation per unit of sale. “ Companies have seen a rise in revenue growth rate but have faced pressure on margins because the percentage rise in costs has gone up far ahead of revenue growth, resulting in a shrink in their profits. They have been facing pressure from the rise in prices of raw materials, high interest cost and growing employee costs as a result of significant salary hikes,” said Kotak Securities vice-president (research) Ketan Karani.
Manufacturing companies, especially those operating in the cement and auto industries, have seen their profits shrinking more. “The cement companies have been under pressure from rising coal prices that have gone up from $60 to $130 and have not been able to increase their prices in the same proportion, resulting in slower growth of profits,” explained Agrawal.
According to Karani, “Auto and auto ancillaries are clearly under cost pressure because of the steep rise in prices of steel and other forgings and I see them as concerned areas for now.”
While on the one hand this is what the industry expected for the quarter, the factors that
have led to this revision in profitability growth seem to be hampering the expectations of the growth in corporate profits in the medium to long term. With GDP numbers getting revised and the pressure likely to be there on companies from high oil prices and raw material prices, a revision in medium to long-term profitability growth seems likely.
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