Stronger Rupee Bumps Up Margins, Profits

Net profit grows after four quarters of decline, but revenue growth and higher interest costs a worry

    In a reversal of trend, operating margins and earnings of India’s top companies, led by the steel, tyre, metal and fast moving consumer goods sectors, improved in the quarter to September, buoyed by a stronger rupee last quarter, which helped stem foreign exchange losses and boost profits. However, what is worrying is slowdown in revenue growth, higher interest costs and increased leveraging. An ETIG analysis of 2,300 companies, excluding banks, financial firms and oil marketing companies, based on data for 13 quarters, shows a turnaround in corporate profitability and operating profit margins. India Inc’s operating profit margins improved to 14.5%, which was thehighest in the past five quarters. Net profit for the quarter rose 25% year-on-year — the highest in the past two years and a welcome break after four consecutive quarters of slide. However, it may be too early to cheer considering that the earnings were boosted because of a strong rupee during the past quarter. The Indian rupee rallied strongly to 52 against the US dollar at the end of the September 2012 quarter — up from 56 at the start of the quarter — helping local companies to cut their forex losses. This took a chunk off other expenditure, boosting operating profits. Since then, the rupee has started sliding and was 55 to the US dollar last weekend.
The latest earnings figures confirm a few worrying trends from the recent past. The growth in net sales, at 10.4%, was the slowest in the past three years, while other income – income from non-core business activities – still constitutes over onefourth of pre-tax profits. And to boot, India Inc’s leveraging has risen during this period. An analysis of half-yearly statement of assets and liabilities published by 1,608 companies, excluding banks and finance, shows that India Inc’s net debt to equity rose to 0.44 at end September 2012 from 0.4 at end March 2012. This was because of a 14.2% rise in net debt, compared to a rise of 4.4% in net worth during the same period. This is also reflected in high interest costs, which ate into 3.4% of net sales revenues – slightly higher than the average for the preceding four quarters. What is also worrying for Indian companies is the macro economic backdrop. Inflation continues to be high — 7.45% in October — dampening the prospects of a possible rate cut, while factory output slipped to 0.4% in September, indicating a contraction in economic activity. The finance minister has scaled down the GDP growth forecast for FY13 to 5.5%, which will be slowest since FY03.
The quarter’s revival in earning numbers was led by sectors such as tyres, steel, metals, mining and minerals, cement and cement products, FMCG, Infotech and power generation. Similarly, the aggregate numbers of smaller industries, such as hospitality, laminates and plywood, agrochemicals, petrochemicals and tyres, were also better than the past few quarters. Sectors such as paper, sugar, solvent extraction and ferro-alloys reported a return to profitability, compared to a loss in the September 2011 quarter. However, the troubles for sectors such as capital goods, real estate and construction, automobiles and telecom continue, given their under-performance, impacting profitability.
What has been heartening is the fact that outbound corporate M&A deals have picked up pace after the lull of 2011 and first half of 2012. Outflows from India, the dominant source of FDI from the Asian region, increased from $13.2 billion in 2010 to $14.8 billion in 2011. However, Indian Transnational Corporations became less active in acquiring overseas assets. The amount of total cross-border M&A purchases decreased significantly in all three sectors — from $5.2 billion to $111 million in the primary sector, from $2.5 billion to $1.5 billion in manufacturing, and from $19 billion to $4.5 billion in services.