Date : May 10, 2008
Costly Raw Material And Manpower
Hit NIFTY Company's Profitability
28 Nifty Companies Saw Their Sales Grow At 29.3%, But Their Profit Growth Has Been Slower At 21.6%
THE big boys of corporate India are reeling under the pressure of increasing raw material costs at one end and declining other income at the other. This reflects in the aggregate performance of more than half of the CNX Nifty companies that have reported financial numbers for the March 2008 quarter.
Out of the 50 CNX Nifty companies, 28 have declared results so far. A look at their aggregate performance indicates that the top layer of India Inc is finding it difficult to convert the robust topline growth into equally impressive expansion in the bottom line. While sales grew by 29.3% during the March 2008 quarter as compared to the corresponding quarter of the previous year, net profit (PAT) rose at a slower pace of 21.6%. On sequential basis, the picture was even gloomy. PAT dropped by 14.8% as compared to the previous quarter even as sales jumped up 7.2%.
A double whammy, comprising a fall in other income and a surge in raw material & employee cost, has substantially pushed down the profitability of these companies. Raw material costs, which form half of the total expenses, went up by 13.3% sequentially as against the average rise of less than 5% in the preceding eight quarters. This is largely on account of an unprecedented rally in prices of most commodities. A sudden plunge in other income worsened the picture.
Other income, which basically comprises of non-core activities like treasury operations and sell of assets, is of significant importance as it accounts for a substantial proportion of PAT. For instance, during the March 2007 quarter, the Nifty 50 companies earned close to 36% of their net profits via other income. This means overall profitability took a knock during the March 2008 quarter given the drop of 45.4% in other income.
Although losses pertaining to forex hedging activities are a primary reason for this fall in other income, turmoil in equity and debt markets has also contributed significantly or has rather eaten into other incomes. This is imperative as a significant portion of India Inc.'s free cash flow is invested in mutual funds and gilts. Further, rise in employee costs has also meant that the margins of India Inc. have thinned substantially.
On the positive side, the sample of 28 Nifty companies has still managed to grow topline significantly during the March 2008 quarter. In fact, the QoQ topline growth is marginally higher than the average 7.1% growth over the last eight quarters. Companies including Sterlite and Nalco have witnessed a sharp jump of over 20% in their respective toplines. However, there have been a few laggards. Sales of DLF, Ranbaxy and ABB have declined.
Performance of 28 Nifty companies:
Particulars Net Sales Raw Material Cost Other Income Net Profit
(Source: -Economic Times)