Mumbai: Almost a fourth of the net profit of Indian companies comes from other income, such as the sale of real estate, equity in subsidiaries, refund of income tax, and treasury operations that include currency and commodity trading, even as analysts, fund managers, and economists continue to debate whether there is a slowdown in corporate earnings (a Mint analysis of 1,056 companies on Monday said a slump might have begun). The trend isn’t an indication of a company’s efficiency, said executives and analysts.
A Mint analysis of 1,301 companies that have announced their January-March results shows that other income accounts for 24% of net profit. These companies represent more than a third of the universe of listed entities in India. Banks and financial institutions have not been considered for this study as banks define “other income” as that arising from bond trading, fees, and commissions on selling bank drafts and providing guarantees. In the case of corporations, other income is generally a one-time income that has nothing to do with their core businesses.
There is no common pattern across companies when it comes to other income, except for the fact that it contributed to net profit. For instance, Mahanagar Telephone Nigam Ltd (MTNL) earned Rs78.25 crore from an income-tax refund; Phoenix Mills Ltd made Rs46.88 crore by selling a building, and Infosys Technologies Ltd earned Rs115 crore from interest on bank deposits and dividend income from investments in mutual funds.
Other income accounted for close to 26% of the net profit of the top 100 firms (by other income) and over 15% of the net profit of 16 of the 19 Sensex companies that have announced their results thus far. The Sensex is the 30-stock benchmark index of the Bombay Stock Exchange. This study has considered only 16 of them as three are banking and mortgage firms.
The numbers corroborate what executives and analysts said about there being no particular trend in the growth of other income. In percentage terms, the contribution of other income to net profit has increased in the January-March quarter for all firms compared with the previous quarter. In the October-December quarter, other income accounted for over 20% of net profit for these 1,301 firms, over 23% of net profit for the top 100 firms, and over 11% of net profit for the 16 Sensex firms. However, in 2006, in the January-March quarter, other income as a percentage of net profit, was even higher. It accounted for close to 33% of net profit for 1,301 firms and over 32% of net profit for the top100 firms. For the 16 Sensex firms, it was lower at around 13% of net profit. In the Mint analysis, the top 100 firms have been chosen based on higher other income; the sample is not the same set of firms in all three quarters.
“Some of the firms are monetising their idle assets such as land and real estate by liquidating them. There is nothing wrong (in it),” said Prabal Banerji, group CFO of the Hinduja group, a conglomerate of automobile, finance and media firms.
Banerji added that riding high on their performance over the recent past, many companies had generated good cash flow which they had effectively deployed (to earn other income). Banerji also pointed to another reason for the rising other income. “Most of the firms have made investment in their subsidiaries and now they are earning dividends from them,” he said.
A senior executive at the Mumbai office of a foreign brokerage, who did not wish to be named, said: “Higher other income always comes with economic growth. One should not get worried about this and start dismissing the overall performance (of corporate India). However, there will be a few firms which are solely depending on other income for their performance.”
The executive cited the example of IFCI, which has posted a net profit in the January-March quarter by selling its stake in a few firms. IFCI is a financial institution and was not considered for the Mint study.
In the January-March quarter, five firms registered other incomes higher than their net profits; that is, minus ‘other income’, they would have made a loss. The list includes Atlas Cycles (Haryana) Ltd, MTNL, and Phoenix Mills.