The profits of the listed companies of India Inc fell almost 4 per cent in 2012. But the mild revival in profits in the latest March quarter offers hope of a better FY-13.Sectors such as tyres, sugar, power, and steel recorded weaker consolidated performance than standalone results.

Anaemic economic growth, unrelenting inflation, weak rupee, policy hurdles — India’s litany of woes over the past several months has been long.

No surprise then that corporate India has had a forgettable FY-2012.

Consider the performance of the listed companies. Of the around 3,700 companies whose standalone results for the last fiscal were analysed, almost 2,000 posted a dip in profits.

Added up, as many as 44 of the 71 sectors to which these companies belong recorded profit declines. Overall, the profits of the listed companies of India Inc fell almost 4 per cent in 2012, compared with the nearly 18 per cent rise in 2011.

Interestingly, this poor show on the bottom-line in FY-12 was despite a robust 23 per cent growth in sales. Clearly, rising cost pressure and inability to pass it on took a toll.

That said, the mild revival in profits in the latest March quarter offers hope of a better FY-13.

Cost squeeze

From spending more on raw materials to paying out higher sums towards interest cost, corporate India was in the grip of a cost squeeze last fiscal. This put paid to expectations that the good run of fiscal 2011 would continue into 2012.

Raw material cost, which accounts for a chunk of the expenses incurred by companies, grew almost 27 per cent in FY-12.

High commodity prices and the depreciating rupee which increased the cost of imports contributed to this. For companies which spend on raw material, input cost as a percentage of sales increased from around 52 per cent in FY-11 to almost 54 per cent in FY-12.

This, along with rise in other costs such as fuel and selling expenses, caused the operating profit margin of companies (excluding those in the banking and finance sectors) to shrink from 17.2 per cent in FY-11 to 14.6 per cent in FY-12.

Companies did try to cut corners in areas they considered discretionary. This perhaps explains the much slower growth (12 per cent) in employee expenses in FY-12 compared with the almost 20 per cent rise seen in 2011.

Net-net, despite higher cost pressure, corporate India managed to grow operating profits in FY-12, even if at a marginal 3 per cent.

But this was undone by the steep rise in financing costs which many companies had to deal with.

With the central bank pegging up rates at regular intervals to combat inflation, and many entities being highly leveraged, the interest cost of non-banking and non-finance companies shot up by almost 42 per cent in FY-12.

This led to net profit growth slipping into negative terrain. Overall, net margins of India Inc dipped from 9.6 per cent in FY-11 to 7.4 per cent in FY-12.

Tough from the word ‘go’

Indications that the year would be tough became apparent in the first quarter itself. In the quarterly result analysis, we have excluded the results of the public sector oil and gas companies whose ad hoc subsidy adjustments distort results. In the first quarter ending June 2011, the profits of India Inc grew at just 3.5 per cent year-on-year despite 26 per cent rise in sales.

From then on, it went steadily downhill, with sales growth decelerating and profit growth entering the negative zone in the second and third quarters.

During this period, the weakness in the rupee exacerbated the pain of high inflation and interest rates.

This was reflected in the almost 45 per cent decline in profits of import-intensive sectors such as glass and consumer durables in the December quarter.

In the latest March quarter, though sales growth continued to slow, the profits of corporate India revived a little and grew at 1.4 per cent. This was a silver lining in an otherwise bleak year and offers a glimmer of hope.

No consolidated help

Did entities which have subsidiaries and present consolidated results buck the trend of declining profits in 2012?

Not quite, suggests the scorecard of around 850 companies. Their aggregated consolidated numbers show a 1.1 per cent dip in FY-12 profits despite 27 per cent growth in sales.

On a standalone basis, these companies grew sales by 25 per cent and profits by 0.4 per cent. This suggests that the cost pressure was felt across subsidiaries, and dragged down performance.

Sectors such as tyres, sugar, power, and steel recorded weaker consolidated performance than standalone results. Tata Steel, for example, was dragged down by its European operations. This caused its consolidated profits in FY-12 to dip around 40 per cent as against the 2.5 per cent fall in its standalone profits.

On the other hand, sectors such as IT-hardware, hotel and restaurants, and FMCG benefited from a stronger consolidated performance. For instance, Hindustan Unilever’s consolidated profits grew nearly 22 per cent compared with the 17 per cent growth in its standalone profits.

Sector divergence

Among the sectors which took big hits in FY-12 were airlines, shipping, consumer durables, and paper.

The standalone losses of the airline companies increased more than four-fold, primarily due to high cost of fuel, which accounted for almost half of sales in fiscal 2012, compared with 36 per cent in FY-11.

The highly leveraged balance-sheets of firms such as Kingfisher Airlines and Jet Airways added to their woes, and they ended up deep in the red in FY-12.

In the case of the shipping sector, charter rates were very low due to fleet oversupply in the global markets.

This, coupled with escalating costs, caused shippers to stray from profits in FY-11 to losses in FY-12. Big players such as Shipping Corporation of India and Mercator were among the major losers.

The consumer durables segment, but for some exceptions such as TTK Prestige, was dragged down by rising costs.

Expenditure other than interest and depreciation for the sector increased from about 90 per cent in FY-11 to around 94 per cent in FY-12.

Paper makers such as JK Paper and TN Newsprint also saw profits dip sharply mainly due to high input and fuel costs.

But sectors such as sugar, cement, and crude oil posted healthy profit growth in the last fiscal. While the low base in FY-11 and high prices helped the sugar sector double its profits in FY-12, the cement sector benefited from pricing power.

Growth in output and high price levels of crude oil helped hydrocarbon explorers such as Cairn India grow profits by more than 25 per cent in FY-12.

Other sectors that did well include FMCG, healthcare, software and paints.

READ ALSO: What lies ahead next fiscal?

anandk@thehindu.co.in

(This article was published on June 23, 2012)
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