Interest rates squeeze corporate bottomline

MUMBAI, June 1: It would have been a year of bumper profits for the corporate sector. The major factor which squeezed the bottomline of com...

MUMBAI, June 1: It would have been a year of bumper profits for the corporate sector. The major factor which squeezed the bottomline of companies is high cost of funds. The sharp rise in interest rates along with the minimum alternate tax (MAT) and the dividend tax have cut into the profits of companies for the year ended March 1996-97.

As is evident from the financial results of top companies, sales turnover of most of them have shot up while the growth rate of net profits has fallen significantly. Even then industry leaders like Reliance, Telco, Bajaj Auto, BPCL, ITC and public sector giants like BHEL, VSNL and BPCL managed to withstand the recessionary impact. “The slowing down of the economy during the second half of the year had resulted in lower order booking during that period. Our customers are facing difficulties for payments,” said S D Kulkarni, managing director and CEO of Larsen & Toubro. Incidentally, L&T reported a 25 % rise in turnover while net profit showed only 5.8 % growth.Major industries affected by demand recession were cement, steel and textiles besides other industry segments like automobiles, paper, consumer durables and petrochemicals. While the profit margins of companies like Indal and Hindalco came under pressure due to low world prices and demand growth, the profit of IPCL in the chemical/petrochem sector declined from Rs 603 crore to Rs 510 crore as raw material prices and end-user demand fluctuated and duties changed much to its disadvantage.

Companies with good market share and monopoly in the market managed to come out with good profits and sales. Bajaj Auto, for example, managed to come out with higher profits even though the sector was facing a rough ride. However, Rahul Bajaj, chief of Bajaj Auto, admitted that the market share of the company in the scooter segment had dipped. Telco, market leaders in commercial vehicles segement, came out with bumper sales and profits. In fact, Telco became the first company in the private corporate sector to race past the Rs 10,000 crore turnover mark.

Similarly, Videsh Sanchar Nigam Ltd, Bharat Petroleum Corporation (BPCL), BHEL and MTNL — all market leaders in their respective segments — recorded handsome profits. VSNL showed a 23 % rise in net profit to Rs 503 crore, BPCL profit shot up by 12 % to Rs 432 crore, BHEL by 34.22 % to Rs 470 crore and MTNL by 21 % to Rs 887 crore profit. Hundreds of other medium-size companies also showed higher sales, but their profit margins were under pressure.

The steep rise in interest rates in 1996-97 created problems on all fronts. Not only this led to demand recession, companies were forced to borrow at high rates to meet their working capital needs. The interest burden of Century Textiles — whose net profit plummeted from Rs 194.70 crore to Rs 2.67 crore — more than tripled from Rs 51.07 crore to Rs 162.69 crore. Telco’s interest outgo this year was Rs 215.04 crore as against Rs 160.78 crore. Reliance paid Rs 170 crore as interest as against Rs 110 crore last year. The interest burden of Larsen was Rs 115 crore as compared to Rs 78 crore.

SAIL, which suffered a 60 % fall in net profit, paid a whopping Rs 1,292 crore interest this year against Rs 808 crore last year. “With the interest rates now coming down, companies will be able to show better bottomlines in the current year. The sad part is that the capital market also remained subdued, forcing companies to abandon their plans to raise public funds. Expansion and modernisation plans of companies are in trouble,” said the finance director of a consumer durables company.

Significantly, many companies which reported lower profits had declared higher dividends and even bonus issues. Century Textiles, Lakshmi Machines Works, Maharashtra Scooters and Godrej Soaps fall under this category. Moreover, all these companies will have to pay the mandatory 10 % dividend tax. Also, companies which are not paying any tax will have to pay MAT.In the meantime, hundreds of small and medum companies have started extending their financial year following poor performance in 1996-97. As many as 20 more companies informed he Bombay Stock Exchange (BSE) on Thursday that they are extending their financial year. “Nearly 75 % of over 5,500 companies have not finalised their financial accounts. Most of them have only finalised the statutory second-half unaudited results,” said a BSE official.

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Many small companies floated by shady promoters in the last two years are unlikely to finalise their accounts as these companies have disappeared after collecting funds from the public.