Corporate bottom lines under pressure

MUMBAI, May 7: For the first time in the last decade, the corporate sector is heading towards a decline in profits. After showing healthy g...

MUMBAI, May 7: For the first time in the last decade, the corporate sector is heading towards a decline in profits. After showing healthy growth in the last several years, the aggregate profit after tax PAT of 35 companies which announced their financial results for the year ended March 1997 fell by one per cent.

The decline in profits is largely attributable to a sharp rise in financial costs and minimum alternate tax MAT, according to a study by the Centre for Monitoring Indian Economy CMIE. Significantly, interest payments of these 35 sample companies increased by more than 26 per cent during 1996-97. The high cost of funds was also one of the major factors for the decline in growth of profits during 1995-96. 8220;These costs had increased by around 25 per cent during 1995-96,8221; CMIE said.

The PAT margin on sales which was showing a consistent improvement over the past five years has also declined during 1996-97. The study covered the financial performance of big companies like Reliance Industries, Grasim, Maruti, GSFC and Crompton Greaves.

It8217;s not only in profits but in sales also the companies showed a disturbing trend. The sales of 35 companies failed to maintain the robust growth of around 25 per cent witnessed during 1994-95 and 1995-96. The sample companies recorded a much slower growth of around 12 per cent in 1996-97. Reliance reported a 12 per cent growth in its sales at Rs 8730 crore and a marginal one per cent rise in PAT. The company which was zero-tax paying for almost two decades has made a provision for tax under MAT for Rs 45 crore. Three major companies in the fertiliser business reported stagnation in sales and decline in profits. The PAT of GSFC fell by 11 per cent to Rs 182 crore, Indo Gulf Fertiliser by 22 per cent to Rs 108 crore and Nagarjuna Fertiliser by 30 per cent to Rs 155 crore.

The net profit of Century Textiles and Industries, belonging to the BK/CK Birla group, plummeted to Rs 2.67 crore from Rs 194.75 crore last year. Two major factors, among others, which affected the Century8217;s performance were high interest rates and massive power cuts. 8220;There was already liquidity crunch and on top of that high interest rates affected the bottom lines of companies. Besides, many parts of the country experienced power cuts ranging from 50 to 80 per cent,8221; said an analyst.

As it turned out, lack of adequate working capital hit the companies. Besides MAT has eaten away the profits in many cases. Century, for example, will have to bring funds from other sources to pay the 60 per cent dividend. It may be noted that Century has several divisions ranging from textiles, cement, shipping, chemicals and paper. Even then the company8217;s bottom line was affected severely. Marketmen said the company has never come out with a such a disappointing performance.

Even public sector companies operating in monopoly areas also witnessed problems.