Lower raw material prices are pegging up margins for many companies and shrinking foreign exchange losses are helping others. Some sectors defied sluggish sales trends as well.

The economy is slowing by the minute, the trade balance is getting worse and reforms are stalling once again. For an investor, there is not much to cheer on the big picture. But the latest quarterly results show that it is not all gloom and doom for individual companies.

Yes, sales growth for India Inc, at 9.3 per cent (for 2,940 companies), reduced to a crawl in the recent September quarter, down from 19 per cent growth four quarters ago. But net profit has begun to expand again and is up 5.4 per cent in the latest September 2012 quarter.

For much of India Inc, relief on costs is in sight too. Lower raw material prices are pegging up margins for many companies and shrinking foreign exchange losses are helping others.

Some sectors defied sluggish sales trends as well. For instance, brokerages upped sales growth to 36 per cent in the recent quarter, and consumer goods and cement managed a 17 to 20 per cent sales growth.

Finally, large-cap companies fared much better than the overall numbers suggest, reining in material costs to maintain stable margins.

(Banks and oil refineries have been excluded from this analysis due to their different cost structure and lumpy earnings.) Here’s more on the trends the recent results season throws up.

Bigger the better

Larger companies — with the BSE 100 as a proxy — have shelled out 43-45 per cent of sales as material costs in the last eight quarters. For the BSE Midcap companies, this band was far wider at 52 to 57 per cent.

The lower cost structure of large-sized companies is explained by the fact that they seem to source materials cheaper and manage inventories better. Jeweller Titan Industries forks out 72 to 75 per cent of sales towards raw material. But Gitanjali Gems had a material-to-sales proportion of 85 to 87 per cent.

Large-sized Asian Paints shelled out 58 to 60 per cent of its sales towards raw material in the past three quarters, while for the smaller Berger Paints, 62 to 65 per cent of sales went towards inputs. This means that the benefits of correcting input prices were felt far more keenly by smaller companies. Expansion in operating profits and margins for them, therefore, shot ahead of large-sized companies in the September quarter this year.

In net profits, large companies trounced the smaller ones as they shelled out far less on interest. By virtue of their size and stability, large companies can borrow at lower interest rates, or have enough accumulated cash stashed away.

Engineering conglomerate Larsen & Toubro, for instance, is able to take loans at interest rates of around 7 per cent unlike smaller players such as Unity Infra, which pays around 13 per cent in interest rates. Dabur India, Godrej Consumer Products and Jyothy Laboratories have all taken debt to fund acquisitions. But while the first two had an interest-to-sales proportion of just 1 per cent, interest costs for the mid-sized Jyothy Labs gobbled 7-9 per cent of sales over the past three quarters.

A drop in interest rates, therefore, could go a long way in jump-starting the flagging net profit growth for mid-sized and small companies. ‘Other income’ lent a helping hand to profits of mid-sized and small companies. But this source is rather unpredictable and tends to vary with quarters.

Sectors that stand out

While the overall sales picture was sedate, a few sectors stood out. The more obvious among these are fast-moving consumer goods companies, whose stocks have seen a corresponding leap in prices. Ceramics and cigarette companies too held on to growth over the past four quarters.

Dark horses include brokerage firms, which were previously floundering. Indiabulls Financial Services, for instance, grew sales and net profits by 37 and 31 per cent, well ahead of the previous quarters. Packaging companies and hotels kept tabs on sales growth but slipped up on the profits front on higher operating costs for the former and interest for the latter. Textiles were chipper on a depreciating rupee and lower input costs.

But in some of these cases, investors may need to watch out for the break-up between prices and volumes. Domestic volumes for Dabur India, for instance, slowed to 9 per cent in the September quarter from the 12 per cent the two quarters before. Similarly, courtesy strong pricing power, cement companies grew a consistent 20 per cent even as total production grew just 5 per cent in the recent September quarter. In these cases it needs to be seen if sales growth keeps up in future quarters as the base effect of earlier price increases wears off.

Bucking the trend

What of sectors that were in a shambles, such as infrastructure, real-estate or consumer durables? Amidst dreary performance, a few did well. Whirlpool India, for example, improved sales growth to 11 per cent in the September quarter over the year ago period against the 7 per cent two quarters ago. Stretching the durables concept to cover sanitary fittings, HSIL too clocked a healthy pace in sales and profits.

Realty player Puravankara Projects chased a 30 per cent growth in the June 2012 quarter with a 38 per cent growth in the September quarter. Urban infrastructure company Pratibha Industries churned out growth of 32 and 30 per cent in sales and net profits even as the infrastructure segment took a dive of 17 per cent in net profits.

Meanwhile, metals major Hindustan Zinc upped sales by 9 per cent in the September quarter, after seeing falling numbers in the earlier quarters. Kalindee Rail, Sintex and NALCO similarly climbed out of the funk their sales were in, posting growth in the September quarter.

Individual performers aside, slowing sales still throw into question the sustenance of profit growth. India Inc’s cost numbers also benefited from a high base in 2011, which could peter out in the coming quarters.

Small and mid-sized companies have little room to bear any cost increases if input prices rise hereon or interest rates remain at current levels.


(This article was published on November 17, 2012)
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