The Hindu Business Line : Cos witness growth in profit margins

Corporates are doing just fine. They have been seeing an improvement in profit margins for 2003-04 to 2005-06 as growth in gross profits between 2001-02 and 2005-06 outpaced sales, says the RBI Annual Report, 2005-06.

A drop in debt servicing and lower dependence on borrowed funds have cut interest payouts, aiding the good times. The report mentions a steep decline in inventory to sales ratio of companies suggesting better inventory management and a dip in demand for working capital.

There has been a steady decline in the share of interest outgo in gross profits in 1990s at 50 per cent to 15.7 per cent in 2005-06. Consequently, the share of pre-tax profits in sales has steadily risen from below 7 per cent in 1990s to 11 per cent in 2005-06.

Higher internal accruals have reduced dependence on borrowed funds. The debt-equity ratio of corporates has declined sharply to around 53 per cent in 2004-05 from about 69 per cent during 1998-2002.

Share of bank borrowings in total borrowings has gone up, suggesting that corporates are in the midst of a major debt restructuring exercise, including retiring high cost debt contracted earlier.

Strong balance sheets will provide the Indian corporate sector greater flexibility in the future to face competition and also enable them to acquire companies, at home and abroad.

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