India Inc.'s profit growth slows, dragged by input, interest costs

Profit growth for India Inc decelerated sharply in the latest September quarter, the initial set of quarterly results from NSE-listed companies show.

Profits for the 300 companies (excluding finance and banks), which have so far declared their numbers, expanded by just 13 per cent in July-September 2011 over a year ago.

The same companies did much better in the June quarter, reporting a 24 per cent year-on-year profit growth. Rising interest costs and input prices were the two main reasons for the lower profit growth.

Input pressures remain

Even as sales for these companies increased by 26 per cent, raw material costs zoomed as a proportion of sales, reducing operating profit margins by 4 percentage points. Operating profits, as a result, increased by just 12 per cent.

Though international prices of key industrial inputs, from crude oil to copper, have corrected 10-15 per cent from their peaks, companies haven't yet reaped the benefits of this fall, partly because they were using up earlier inventories and partly due to a weaker rupee which has made imports costlier.

Domestic price increases in coal and steel too may have played a role. Overall, material costs took away 57.2 per cent of sales for the 300 companies, showing no decline from the June quarter.

Companies in sectors such as auto components, capital goods, gems and jewellery and steel faced the most strain from escalating costs. For instance, a 75 per cent jump in Alfa Laval's input costs compared to a year-ago saw its net profits decline in the latest September quarter.

Forex angle

The depreciation of the rupee against the dollar also added a forex loss component to costs for quite a few companies, though such losses made less than a 2 per cent dent on operating profits at the aggregate level.

Companies such as JSW Steel, Chennai Petroleum and MRPL which have a large import bill on inputs reported significantly higher forex losses than last year.

Companies with borrowings in foreign currency such as Suzlon Energy and Sesa Goa, too, saw expenses balloon on adverse rupee movements. In contrast and predictably, forex gains powered higher realisations and profits for tech majors such as Infosys and TCS as well as many mid-size software players.

sales losing momentum

Companies also saw their sales growth (26 per cent) losing momentum from June (31 per cent). Many of them in sectors such as paints, consumer durables and jewellery struggled to make the trade-off between hiking product prices further and holding on to sales this quarter.

Despite a 24 per cent growth in its consolidated sales, Asian Paints reported a dip in its net profits due to higher input costs and subdued demand in its automotive division.

Interest costs were the third big villain of the piece, swelling by 43 per cent year-on-year and denting profitability at the net level.

Interest costs took away 8.7 per cent of the operating profits of the 300 companies just three months ago, in June. But with lending rates shooting up further, companies paid out 10.5 per cent of their operating profits as interest in the September quarter.

Even as nearly half the companies reported actual profit declines, a few bucked the trend. From the initial set of results, it was sectors such as software, automobiles, gems and jewellery and sugar that salvaged the overall picture with robust double-digit profit growth.

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