So you’re worried because year-on-year (y-o-y) growth in profit after tax for the Sensex companies has turned negative by 10%? Or because profit after tax of the Sensex companies, excluding the oil firms, has shrunk by 4.3%? Consider then the carnage that has taken place among the smaller companies during the December quarter.
Aggregate net profit of 2,547 firms with quarterly net sales of up to Rs100 crore plunged 93.26% in the December quarter, compared with the year-ago period. During the September quarter, profit after tax of these firms was down a mere 3.73% y-o-y. And if you exclude banks, financial firms and oil companies, 2,120 firms with revenue of less than Rs100 crore saw their net profits shrink by 97.7% y-o-y. These firms had seen their aggregate net profit drop a much smaller 7.89% in the September quarter. In contrast, the drop in profit among bigger firms during the December quarter has been far more muted.
Also See Bleeding Companies (Graphic)
As many as 118 firms with revenue of at least Rs1,000 crore, for instance, saw a drop of only 7.79% y-o-y in their net profit, while 82 firms with revenue of between Rs501 crore and Rs1,000 crore saw their net profit fall 8.51% y-o-y. As many as 454 firms with revenue of between Rs100 crore and Rs500 crore saw their net profit fall 58.18% y-o-y. The implication is very clear—the smaller the company, the bigger the impact of the slowdown. That’s rather obvious, because the bigger companies typically delay payments they owe to smaller companies and make adjustments in their working capital at the expense of their smaller suppliers. The recent stories of the woes of the suppliers of automotive parts are examples.
The cost in human terms is higher when small firms fail because they are usually the most labour-intensive and more people lose their jobs.
Most analysts expect earnings to bottom out in the first or second quarter of FY10. But here’s what Citigroup Inc. has to say: “It looks only a tad better ahead… We forecast a -1% earnings growth into the next year… The last time earnings fell (2001, full year), they bounced back sharply in the next year… Our numbers suggest it will be different this time.”
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Graphics by Paras Jain / Mint