Monday, May 30, 2011

Q4 Net Best in 3 Years But Potholes Ahead

Data for 1,965 companies indicate no impact of rising interest rates, inflation on Indian Inc earnings

India Inc seems to be in the pink of health if one goes by the results of the quarter ended March. There appears to be no sign, so far, of inflation or rising interest rates biting into corporate earnings. But analysts say the future may not be as rosy.
Data compiled for 1,965 companies shows they earned higher net profits per rupee of sales during the March quarter, the best performance in almost three years. These firms exclude banking, finance and staterun petroleum companies.
The operating profit margins of these firms, too, were better than the year-ago figures, indicating that rising borrowing costs have not pinched their profits yet. Rising inflation, which is pushing up the cost of raw materials, also did not impact the profit margins, as was expected.
The proportion of raw material costs to net sales did go up to 43.4%, the highest since the quarter ended September 2008. It was 110 basis points higher than the March 2010 quarter. This means India Inc was largely able to pass on the rising cost of raw materials to customers.

In the Right Quarter
Net Profit Margins: Net profit margin at 9.3% during Q4 of FY11 is the best in almost 3 years
Interest cost: Interest costs rose 33.6% over year-ago figure. Still, at 2.34% of net sales, impact on profitability was least among 4 quarters of FY11
Effective Tax Rate: Proportion that firms pay towards tax out of pre-tax profits has hit a 2-year low of 23.5%
23.6% : Y-o-Y net sales growth. Demand was strong though firms passed on a part of cost hikes

Rising Prices didn’t Hit Demand
The year-on-year net sales growth was robust at 23.6% in the March quarter on the back of a high base. The year-ago quarter had recorded a 29.3% growth in sales. This indicates that rising prices did not dampen domestic consumption.
The companies continued to derive higher operational efficiency by cutting expenditure under other heads, such as employees, power and fuel. The expenditure under these heads showed a declining trend as a proportion to net sales. In other words, for every rupee spent on these items, Indian companies derived higher net sales. This was the reason behind their safeguarding, and even improving, operating profit margins in the tough scenario. As companies roll out their annual increments in the first or second quarters of FY12, this scenario could change.
Interest cost jumped 33.6% against the year-ago period and accounted for 2.34% of the sales revenue during the March quarter. Although higher year-on-year, this ratio was the lowest for FY11. The healthy sales growth seems to have taken the steam out of the rising interest cost burden. A steep 200-basis-point fall in the effective tax rate was another reason behind an improvement in the net profit margins in the March quarter. This is surprising given the government’s efforts at increasing the Minimum Alternate Tax rates and bringing down the number of tax exemptions in recent years.
However, this appears to be due to a combination of three factors — increase in the number of loss-making companies, MAT credits claimed by firms and a chunk of incremental profits coming from projects that still enjoy tax exemptions.
Analysts, however, say the last quarter of FY11 did not provide much of an indication of the challenges ahead.

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