Be Wary of Economy, Rates and the ‘Other’

Profit margins of India’s top companies have improved in the quarter ended March 2013, hitting a seven-quarter high on easing raw material costs and interest rates. However, what is worrying is that there are early indications of a bumpy ride ahead as revenue growth slows due to faltering economic growth

First the good news. An ETIG analysis of the March quarter results of over 826 companies, excluding banks and fi nancial institutions, shows that their operating profi t margins have improved, thanks to easing raw material costs. Net profit margins, too, are now at a seven-quarter high of 8.6% aided by lower interest rates.
But there are worry lines. Indian corporates are now battling a severe slowdown in sales with aggregate revenues of companies, featured in the analysis, rising just 5% year-on-year — the slowest in at least 10 quarters. 
The other sobering fact is that India Inc’s net profit growth has largely been due to a spurt in other income, which at 27.7% of pre-tax profit was the highest in at least eight quarters.
What also contributed to net profi t growth was the drop in effective tax rate, or tax expense as a percentage to pre-tax profit. At 22.8 %, this was at an eight quarter low. In other words, much of the profi t margin growth is coming from nonoperational areas.
Over 1,200 companies are on course to announce their March ’13 quarter results by the end of this month, which may well influence or alter these fi ndings. Still, the declining sales growth ought to worry Indian companies, unless the trend reverses this fi scal. Source: ETIG Database