Tighter cost control, lower forex losses help companies perform better
Operating profits for the first 326 companies that have declared December quarter results grew 27 per cent over same period of last year improving vastly upon the 16 per cent growth in the September 2012 quarter over the previous year.
The profits came from economies on overheads and lower forex losses, not sales growth. Indeed, the first set of results indicates that the sales slide has not stopped. At 15 per cent for the December quarter over previous period, sales grew lower than the 17 per cent expansion in the September 2012 quarter over the corresponding previous quarter.
For this analysis, banking and financial companies were excluded as their cost and revenue structure is different.
The cost picture has been brightening for three quarters now. For one, prices of global commodities — oil, cement, and so on — have either cooled or stayed put. Durables maker Blue Star, for instance, shelled out 72 per cent of sales revenue towards raw materials in the December 2012 quarter against 78 per cent in the year-ago period. Steel and realty companies too saw dips in the material-to-sales ratio. As a proportion of sales, material costs have remained at 73 per cent for manufacturing companies.
The steadier rupee helped stem forex losses, which dropped by a third. Companies also controlled costs with the result that other miscellaneous expenses shrank.
Other expenses as a percentage of sales fell sharply to 12.3 per cent in the December 2012 quarter compared to the 14 per cent in the year-ago period. Profits also got a bump up with ‘other operating income’ component, which rose 15 per cent in the December 2012 quarter. This component includes income from non-core activities such as scrap sales.
Interest costs tell
But while operating costs provided relief, interest cost remained a burden for Corporate India. Total interest costs were up a good 30 per cent, creeping up to 2.1 per cent of sales.
Companies such as Bajaj Auto, Sesa Goa, JP Power Ventures and smaller players in the steel space saw stiff increases of over two percentage points in the interest-to-sales ratio.
Interest outgo together with a slight rise in depreciation costs resulted in net profits growing 17 per cent in the December 2012 quarter over the year-ago period.
This is slower than the 22 per cent in the September quarter, when depreciation barely rose. A sustained increase in depreciation could indicate a revival in the industrial capex cycle.
While it may be early days yet to draw conclusions, signs point to a sales volume slowdown in market favourites — pharmaceuticals and fast-moving consumer goods.
The former is facing trouble in the domestic formulations space, while the latter is seeing penny-pinching consumers bringing down volume growth. Another sector to see a slowdown is agro chemicals, suffering from a late monsoon.