Many corporates shock investors with their earnings card

It is bad enough if profits are not growing at a healthy clip. But an actual decline should be a serious cause for worry. A large swathe of India Inc presents just such a picture.

Forty per cent of the 500 companies that make up the CNX 500 index saw their profits fall in the first quarter of this fiscal (April-June 2011) from a year ago.

The picture has deteriorated from 2010-11, when 30 per cent of the companies suffered profit declines.

That's the disturbing aspect of the latest quarterly results, even as the overall numbers look quite good.

On an aggregate basis, CNX 500 companies managed a 9.5 per cent growth in net profits on a 29 per cent expansion in sales in the latest June quarter.

The earnings shocks came from unexpected quarters.

Services companies disappoint

Services sectors such as banking and finance, telecom, mid-tier software, realty and construction made up over half the list of 188 companies which reported profit declines.

Escalating costs, which squeezed profit margins, were the biggest reason for profit drops, with nearly 80 per cent of the companies in the sample a prey to this trend.

The cost pressures took many forms. For banks and finance companies, rising cost of funds and provisions towards bad loans dented profits.

The 46 per cent decline in SBI's net profits for the quarter was triggered by a spike in bad loan provisions and losses on its investments.

IVRCL's 85 per cent profit plunge was attributable to higher project costs that were not covered by escalation clauses, even as it faced execution delays by sub-contractors.

Patni Computer Systems' saw its profits slip after a spike in staff costs and severance payments to employees.

Not so defensive

In traditional manufacturing, sectors such as consumer durables and pharmaceuticals, regarded as ‘defensive' bets, sprang some nasty surprises. Blue Star, Whirlpool of India, Bajaj Electricals and MIRC Electronics – all reported declines in their net profit.

Whirpool of India saw its profits slip by 20 per cent, on sales that were lower by 7 per cent, after growing at a furious pace last year.

The company's numbers were hit by lower-than-expected summer season sales of fridges and air-conditioners and rising costs of materials.

Soaring raw material costs were the main worry for the dozen mid-sized pharma companies which reported profit declines.

They saw raw material costs expand at twice the rate as their sales, suggesting that they weren't able to pass on much of the impact from input costs to their consumers.

Interest rates hurt

Rising interest rates played the final villain of the piece. Overall interest costs for the CNX 500 companies shot up by 42 per cent year-on-year, at a pace much higher than sales growth (29 per cent).

Working capital-intensive sectors and companies that had taken on high debt to fund acquisitions faced the most pressure on this count. Construction companies faced execution delays and used up more working capital. They saw their interest costs spike by 45 per cent year-on-year, resulting in their net profits dropping by a third this quarter.

Telecom companies also saw profits dip due to rising interest costs after borrowing to fund 3G rollouts. Bharti Airtel saw its June quarter profits decline by 28 per cent, after it raised borrowings for its African acquisition and 3G rollout.

Market participants have reacted with alacrity to the bigger earnings ‘shocks', cutting their profit projections and price targets for stocks.

However, the worry now is whether India Inc can still manage to deliver the 12-13 per cent growth expected of it, with such large swathes of the listed universe registering profit drops.

COMMENT NOW