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Low interest, input costs behind better annual profits

Low interest, input costs behind better annual profits
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First Published: Thu, Jun 03 2010. 12 08 AM IST

Graphic: Ahmed Raza Khan / Mint
Graphic: Ahmed Raza Khan / Mint
Updated: Thu, Jun 03 2010. 12 08 AM IST
Mumbai: Significant savings in raw material costs and interest expenses boosted the earnings of Indian manufacturing firms in 2009-10 as companies tightened their belts to combat a global economic slowdown. It is uncertain whether these advantages remain, and even though demand has picked up and new projects are being commissioned, earnings growth in the current fiscal could well be muted, say analysts.
Net profits in the just-ended fiscal for 2,046 manufacturing companies gained 23%, a bounce-back from the previous year, when they fell 10%. During the first half of the year, when demand was still muted, companies cut costs in all areas, including salaries and wages, and sales, and administrative expenses. Consequently, their aggregate total expenditure grew only 7.7%, the least in at least six years. However, the two main contributing factors in this were the reduction in input costs and fall in interest payments.
Graphic: Ahmed Raza Khan / Mint
Had there been no change in these two factors from the year earlier, the profit growth in 2009-10 would have been just 9%.
Raw material costs as a percentage of net sales fell to 37.1% for the year, compared with 38% a year ago. Similarly, interest costs as a portion of net sales fell to 2.6% versus 3.04% a year ago.
If these costs had remained in the same proportion to net sales, the aggregate net profit of these firms would have been Rs1.4 trillion instead of the reported Rs1.6 trillion.
Most companies were able to cut input costs despite the rise in prices of raw materials such as steel and aluminium during the year, as the global economy began recovering.
Prices of steel coils rose 37.5% during the year to Rs38,500 a tonne. In the London metal market, the price of aluminium rose 70%, while that of copper nearly doubled. And that of crude oil, too, rose by nearly 70%.
Despite these rising prices, firms were able to take advantage of the low prices at the beginning of the year by booking forward contracts, but now “all contracts are getting repriced and there is some amount of margin pressure”, said Mohan K.R. Swamy, head of equity research at the Royal Bank of Scotland’s securities unit.
On the interest rate front, too, firms gained from the easy money policy pursued by the central bank till October.
That, along with debt restructuring, led to a smaller interest outgo for many firms. Interest costs fell nearly 6%, the first time in five years that this metric recorded a decline.
Firms also raised a record Rs1 trillion from the equity market through fresh share sales, private placement with institutions, and rights issues. This helped them retire a large part of debt they had taken earlier.
Market outlook
The Street is still looking at about 20% earnings growth this fiscal, but the outlook turns murkier with a slowdown on in Europe, and China’s efforts to cool down the economy looming large over both commodity and money markets.
“It is very uncertain at the moment how commodity prices will play out this year,” said Deepak Jasani, head of retail research at brokerage firm HDFC Securities Ltd.
For one, while commodity prices are moving down against the dollar, so is the rupee, in effect cancelling out any gains.
The bright spot, however, is the increase in demand and the growth in manufacturing as seen from the HSBC Markit Purchasing Managers’ Index, which gained the most in two years.
“Personal spending continues and projects could get commissioned. There are initial healthy signs of private sector capital expenditure plans,” added Jasani.
An interplay of these factors would determine the earnings growth this year.
ravi.k@livemint.com
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First Published: Thu, Jun 03 2010. 12 08 AM IST