|Rediff India Abroad Home | All the sections|
One in every three companies reports net loss
B G Shirsat in Mumbai | February 24, 2009
The corporate sector has fared badly during the third quarter ended December 2008.
In the third quarter, the 2,431 companies in manufacturing and services sectors posted their biggest-ever net profit decline of 42.45 per cent on slower sales growth of 9.74 per cent. Their net profit had declined by 34 per cent in the second quarter but was up by 10.2 per cent in the first quarter. During both these quarters, their sales had grown 38-39 per cent.
The private sector fared badly in the third quarter with a sales growth of 10.7 per cent and a net profit decline of 47.6 per cent. In the first two quarters, the private sector did comparatively well with only 6.1 per cent decline in net profit compared to a 33.9 per cent decline by the entire corporate sector.
In absolute terms, the net sales of the sample companies increased by Rs 56,857 crore (Rs 568.57 billion) in the third quarter compared to Rs 199,342 crore (Rs 1993.42 billion) in the second quarter and Rs 182,920 crore (Rs 1829.20 billion) in the first.
The share of absolute increase in raw material cost in the incremental sales of the sample companies declined to 46.5 per cent in the first quarter and 22.9 per cent in the second. This indicated that though companies have benefited from the decline in raw material costs, they could not cash in on the fall due to demand recession.
Overseas borrowings through foreign currency convertible bonds (FCCBs), external commercial borrowings (ECBs) and private placement of debt for expansion, modernisation and acquisition have taken a heavy toll on corporate earnings with interest burden rising almost 100 per cent in all the three quarters. Apart from the slowdown in sales growth rate and rising interest burden, the net profit of the corporate sector was under strain due to provision for MTM losses on foreign currency loans and derivative products.
Now, companies have started provisioning for actuarial losses on retirement benefits, restructuring of financial assets of subsidiaries and other foreign currency financial assets, liabilities and receivables that do not qualify for hedge accounting.
Companies with foreign currency loans in their books reported translation losses to the extent of increase in rupee-term liability against such loans. Total translation losses on foreign currency loans stood at Rs 26,399 crore (Rs 263.99 billion) in the first nine months of this financial year. This amount comes to 65 per cent of the Rs 40,475 crore (Rs 404.75 billion) net profit decline witnessed by the corporate sector during the period.
As many as 335 companies made provisions of Rs 9,618 crore (Rs 96.18 billion) for MTM losses in the third quarter, while 165 companies provided Rs 9,815 crore (Rs 98.15 billion) in the second quarter and 107 firms set aside Rs 6,966 crore (Rs 69.66 billion) in the first for such losses.
Though MTM provisioning for translation losses on account of currency fluctuations reduces the net profit, it does not affect the cash flow of companies. No wonder, the net profit of the sample companies in absolute term declined by Rs 25,630 crore (Rs 256.30 billion) in the third quarter and Rs 20,059 crore (Rs 200.59 billion) in the second quarter. However, it was up by Rs 2,482 crore (Rs 24.82 billion) in the first quarter.
Apart from the slower growth in sales, the poor performance in the third quarter is also attributed to 755 companies reporting a net loss of Rs 12,327 crore (Rs 123.27 billion).
An analysis of the results showed 1,062 companies were in deep trouble with 18 per cent decline in sales in the third quarter compared to a 22 per cent rise in the second quarter and 29 per cent jump in the first. So, the net profit of these firms declined sharply by 73 per cent in the third quarter compared to a fall of 12 per cent in the second quarter and an increase of 23 per cent in the first quarter.
As many as 1,369 companies showed sales growth of 26 per cent in the third quarter compared to 47 per cent each in the first and second quarters. With raw material and interest costs (up 100 per cent in all three quarters) moving at a higher pace than the growth in sales, these firms reported a modest 13 per cent decline in net profit in the quarter under review. The net profit of these firms had declined by 49 per cent in the second quarter compared to a net profit growth of 3 per cent in the first quarter.
The companies that showed an increase in sales were from oil marketing, information technology (IT), fast moving consumer goods (FMCG), power, steel, capital goods and pharmaceutical sectors. The companies that posted a decline in sales were from refineries, automobiles, realty, metals, auto ancillaries and tyre sectors.
The aggregate performance of Sensex companies was below expectations with their operating profit declining by 7 per cent and net profit by 12 per cent. The Sensex aggregate performance was impacted by ONGC, DLF and loss-making Ranbaxy [Get Quote] and Tata Motors. While seven companies sprang a surprise with increased operating margins, 12 have disappointed.
There have been significant intra-sector divergences in the third quarter performance. For instance, Hero Honda reported a net profit growth of 9 per cent, while other auto majors posted a decline in earnings.