Companies fail to fulfil projected profit level

ITC Bhadrachalam which made an issue had promised a net profit of Rs 68.83 crore for the year ended March 1997. However, it registered a net profit of only Rs 16.72 crore. The reasons attributed to the fall in profits are the delay in commissioning of the new paper machine, demand recession afflicting the industry since the beginning of the year and the difficult situation being faced by the subsidiary, ITC Bhadrachalam Finance & Investments Ltd.

Similarly, cement giant ACC promised a net profit of Rs 200 crore while going in for a rights issue last year. However, the company came out with a net profit of only Rs 76.92 crore. “The fall in profit is due to the adverse scenario in the cement industry coupled with unprecedented cost increases in major inputs such as coal and power. A rise in transportation costs also exerted pressure on the profits,” said a company official.

Indo Rama Synthetics promised a profit of around Rs 100 crore, but showed only Rs 1.55 crore net profit when the company unveiled its performance last week. O P Lohia, managing director, attributed this to high interest charges of Rs 73 crore and depreciation of Rs 57 crore.

The demand recession, rising input costs, high interest rates, power cut in many states, rise in power charges and fall in customs duty added to the woes of companies in textiles, steel, petrochemicals, paper and chemical sectors. The year 1996-97 has been a difficult one for the corporate sector, but analysts predict a recovery.

At least 4,000 companies have floated issues in the last five years (since 1992). According to the chief of a database company, around 3,000 companies will not be in a position to meet the profitability promises made during the time of raising public money. Incidentally, three-fourth of these companies are quoting below their offer prices. “I will not be surprised if hundreds of companies fail to finalise their balance sheet as many have disappeared after collecting money from the public,” said a finance company chief.

In fact, majority of such companies will be from the financial services sector. These companies raised money when the new issue guidelines were lax in the 1993-94 period. Not only their share prices are now quoting below the face value, investors can not hope to get any dividend. These companies used rosy projections to sell their public issues. Once bitten twice shy, it is unlikely that investors will once again fall prey to such promises in the future. It is time for the market regulator SEBI to look at promises of companies and their actual performance.