A Moneylife analysis of 1,099 companies shows a lot of them have increased profits, helped by lower commodity prices even though sales growth has slowed down
The 1,099 companies in the Moneylife database clocked aggregate sales of Rs11,77,846 crore when compared to Rs10,39,595 crore recorded in the same quarter last year, or 13% higher on a y-o-y basis. Both operating profit and net profit grew 32% y-o-y and 68% y-o-y, on an absolute basis, to Rs1,76,911.5 crore and Rs1,07,255.4 crore respectively. Out of the 1,099 companies, nearly half of the companies reported net profit higher than last year despite even as roughly two-thirds of the companies saw their net sales increase on a year-on-year (y-o-y) basis. This shows that companies have been able to keep cost under control even as inflation continues to worry the Reserve Bank of India (RBI) and companies.
Furthermore, a more important measure is margins. On an overall basis, operating profit margins have expanded by more than two percentage points, y-o-y, to 15.02% while net profit margins have expanded by nearly three percentage points, y-o-y, to 9.11%. This is impressive and shows that topline is not all. This also shows that companies have exuded far more cost control than before in the face of slackening demand, mainly helped my lower commodity prices. Last year, operating profits declined by 10% (when compared to September 2010). This year, however, companies have managed to grow operating profit by 32%, a significant number. Considering that global situation is far more difficult today than last year, companies have managed to do well.
If you look at the aggregate net sales and profit figures, net sales have hardly increased (only by 13% y-o-y) while profit increased by 68% y-o-y. Sales have been subdued because of lack of demand. Higher interest rates, lack of liquidity due to a hawkish stance by the Reserve Bank of India (RBI) have forced consumers to cut down on spending. Net sales slowed down even on a y-o-y basis, by seven percentage points. As demand slows down, companies are forced to cut down on capital expenditure and spend only once demand picks up. This has kept operating profit up. This is one of the cornerstones of cost management. Some companies are waiting for the opportune moment to invest, especially that raw materials are now cheaper to produce items. During difficult times, it is the only controllable variable companies can do to keep profits stable keeping in mind shareholder interests. And in this realm, they have done well, considering that RBI has taken a hawkish stance and not resorted to monetary easing nor have their done any open market operations (OMO).
Whether the third quarter results will be good is in doubt as America prepares to tackle the fiscal cliff while there seems no end in sight to the Eurozone crisis. Several Bills are due to be passed in the parliament in the winter session of the parliament, including the landmark Foreign Direct Investment (FDI) in retail and FDI in aviation, which could be game changers and possibly stimulate the market, at least in the short-term. But all this is uncertain as political wrangling continues and this could affect companies’ decision making on investment matters. Companies are on wait and watch mode and striving for consistency in cost management.
You can check out our similar analysis we’d done on previous quarters below:
The Election Commission said that Modhwadia's remarks prima facie violated Model Code of Conduct which prohibits personal attacks on the leaders of rival political parties
The apex court made it clear its verdict for appointment of people from judicial background in information commissions was not aimed at rehabilitating judges but to make information panels independent of the government's influence