Slowdown signs visible

Margins amp; revenues in Q3

Income. The cumulative income of the sample 406 companies in the BSE 500 took a battering in the third quarter. The pace of growth in income during Q3 year-on-year dropped sharply to 13.8 per cent from 37.4 per cent in Q2 year-on-year. Dipen Shah,vice president,private client group-research,Kotak Securities,attributes this to a demand contraction globally. In the last two quarters,companies were unable to maintain the margins but had decent revenue growth. Now,the trend has reversed and the concern has shifted to topline growth, he says.

Net profit. The net profit figures,on the other hand,showed slight improvement. It dropped 24.3 per cent,a little lower than the 29.3 per cent reduction witnessed in the second quarter. Explains Sandesh Wadhwa,head-fundamental research,SMC Wealth Management,This improvement is due to various cost control and efficiency improvement measures adopted by manufacturers.

Margins. The profit margins and the operating profit margins have significantly improved from Q2 to Q3 on year-on-yeary-o-y basis. There was an increase of nearly one percentage point and about four percentage points in both the margins respectively,during the period. The commodity prices are now in a consolidation phase and may not witness any major downfall. Therefore,the chances of raw material costs going down further appear bleak.

Rationalisation of labour costs and efficiency improvement may improve margins up to a certain extent but we do not expect any major improvement in the margins in the near future, adds Wadhwa.

Expenses. The total expenses and the raw material expenses as a percentage of income of these companies have also come down in this quarter compared to the last two quarters. The other sub-heads such as salaries and interest expenses as a per cent of income have inched up a bit during the period. Cost rationalisation has shown results in this quarter although corporates are still dealing with high costs of inventories which effected the working capital cycle. Pressure of higher interest cost on profits will be lower in the coming few quarters as one will see fall in working capital requirements in sectors like steel,utilities,real estate and autos and also rationalising inventory write downs, adds Ashish Kukreja,head private client group,Unicon Financial.

This quarter and the road ahead

Current quarter. India Incs performance in the third quarter did not match expectations. There was low volume off take although positive coupled with increase in salary and interest cost as compared to the last two quarters, says Kukreja. Also,forex losses,a steady increase in interest and salary costs and still a high cost of capitalisation has added to the miseries of the corporates. Moreover,the fast pace of growth witnessed during the last few years is also partly responsible as it took the demand for goods and services and even stocks to a new high,which resulted in high inflation,which in turn resulted in higher interest rates. Many companies expanded too fast by taking debt whereas their equity base did not support it and now they are facing the heat. Therefore in hindsight,one can say that such a correction,not only in the stock markets but also in economy in general,was bound to happen, highlights Wadhwa.

Road ahead. The scenario for the next quarter will remain as challenging as this quarter. Shah says,Revenue growth will still remain a challenge in the next quarter as there is a slowdown in demand for goods and services. On the margin front,however,the companies would be comfortable. The corporate sector,in FY 09 may witness a single digit profit growth. According to Wadhwa,quarter four may see slight improvement over Q3. Going forward,any major improvement in the earnings would take some time,may be by the end of second quarter of FY10, says Wadhwa.

Sector watch

Auto: The sector witnessed the steepest decline during the third quarter owing to sharp downfall in volumes and cost escalation. Pressure would be easing gradually as high cost inventory comes down in next few months. On y-o-y basis,the sector would still show negative growth at bottomline, says Vaishali Jajoo,senior research analyst-automobile,Angel Broking.

Banking. The sector posted positive growth in income as well as net profit compared with the last two quarters. The quarter-on-quarter growth in net interest income NII stood at 9.4 per cent. However,the net non-performing assets NPA too rose simultaneously by 4.7 per cent. The jump in NII was due to 24 per cent credit growth and improved margins. At the operating level,profits are expected to grow by 15-18 per cent in the next two quarters, says PS Subramaniam,banking analyst,SBICAP Securities.

FMCG. This sector has been the most resilient one. Though income and profits dipped,the profit margins remained intact. Quarters ahead will profit from reduction in raw material cost, says Kukreja.

Healthcare. This sector,too,was hit during the quarter and showed a sharp drop in profits. Major foreign exchange losses from foreign currency convertible bonds FCCB outstanding and currency hedge attributed to such downfalls.

IT. The overall performance was not good. While rupee depreciation helped the sector to retain its profit margin,the sector witnessed drop in volume and profits. The operating profit margins,on the other hand,inched up by 100 basis points from the last quarter.

Metals. This sector continued to show poor performance. The raw material expenses as a per cent of income grew by six percentage points compared with the last quarter on the back of high coking coal prices in futures market.

Realty. The sector posted a negative income of 58.7 per cent and losses of 76.3 per cent. The interest expense as a percentage of income scaled up to nearly 30.6 per cent from 16.6 per cent in the previous quarter. Concerns about the income levels,negative sentiments among the buyers and concerns over job losses have reduced the demand for housing says Shah of Kotak Securities.

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