Profit margins of top Indian firms have sunk to a seven-year low on higher expenses and slowing sales, stand-alone earnings in the three months ended 30 June show.

The profit made on every rupee of goods sold or services rendered, or the net profit margin, was the lowest in at least 28 quarters, and total expenses accounted for 80% of revenue. Raw material prices as a percentage of sales were at a seven-year high, at more than 40% of revenue.

The Mint analysis considered 45 out of 50 companies on the Nifty index on the National Stock Exchange (NSE) for which data is available for the past seven years. The analysis considered 28 of 30 firms constituting the benchmark Sensex of the BSE, and 354 companies on the BSE-500 on the same grounds. All Sensex firms are a part of Nifty.

For the Nifty firms, the net profit margin was 9.12%. For Sensex firms, it was a shade better at 12.84%, but for the BSE-500 companies, it was an abysmal 3.2%.

The drop in the profit margin was mainly due to higher commodity prices, experts said. The margins, however, may have hit a bottom, they said.

“More than half the companies showed a decline in margins... Falling margins have driven earnings downgrades in the past 18 months. Margins this quarter fell again to a new low," Bank of America (BofA) Merrill Lynch said in a 17 August India strategy report. “The good news was that ex-commodity margins have bottomed. We think margins may be close to bottoming out."

Although there has been some correction in crude oil prices, the Thomson Reuters/Jefferies CRB Index, a global commodities benchmark, has risen 13.66% from a low of 267.16 on 21 June.

Rate of sales growth of all companies considered for this analysis dropped to an 11-quarter low, with aggregate net sales of Nifty firms growing 16% to close to 4.11 trillion. Sales growth of the 28 Sensex firms was 16.53% to about 3.08 trillion, while that of the BSE-500 companies was 10.89% to 8.67 trillion.

“As expected, sales growth has started to slow in line with the general slowdown. Led by commodity companies, aggregate sales growth for Sensex companies came in at the lowest in last 11 quarters," the BofA Merrill Lynch report said.

Interest costs as a percentage of sales were at a seven-year high of 3.77% for the BSE-500 companies and at a 13-quarter high for both Sensex and Nifty companies. Interest outgo formed 2.4% of revenue for Nifty companies and 2.32% for Sensex firms.

“Though interest rates seem to have bottomed out, we need to see rates starting to decline and investments pick up. Only then we can say that the worst is over," said Sunil Jain, vice-president of equity research, Nirmal Bang Securities Pvt. Ltd. “It is quite possible that rates continue to remain at current levels for the next six months, or may even inch up in the coming busy (festival) season."

The Reserve Bank of India (RBI) has cut the cash reserve ratio (CRR), or the portion of deposits commercial banks need to keep with the central bank, by 1.25 percentage points since January and pared the policy rate by half a percentage point.

The net profit of the 45 Nifty firms dropped 6.8% from the year-ago period to 37,470.61 crore.

“Oil marketing companies have reported huge losses on account of no allocation of subsidy amount, and that has impacted the aggregate profit after tax of Nifty companies," Jain said.

Bharat Petroleum Corp. Ltd, the only state-owned oil company in the Nifty index, posted a loss of 8,837 crore, up from a net loss of 2,562 crore a year ago. Net sales rose 18.23% to 54,523 crore.

Hindustan Petroleum Corp. Ltd, the nation’s third-largest fuel retailer, posted a loss of 9,249 crore in the June quarter.

Indian Oil Corp. Ltd is losing 1.37 for every litre of petrol it sells and it reported a record loss of 22,451 crore for the June quarter, compared with a loss of 3,719 crore a year ago. Revenue increased 12.4% to 1.02 trillion.

For the 354 companies in the wider BSE-500 index, the fall in net profit was a steeper 52% to 27,728.57 crore.

Net profit of the 28 Sensex companies, however, rose 12.8% to 39,509.18 crore, a four-quarter low.

“FY13 Sensex earnings per share (EPS) was downgraded again by 2% to 1,215. The bottom-up Sensex EPS is now close to our long-standing top-down view of 1,200 making us wonder if even we may prove optimistic," said the BofA Merrill Lynch report.

According to the report, banks have propped up profit figures, but the commodities companies spoilt the show.

State Bank of India’s June quarter profit more than doubled, exceeding expectations, but the performance was dwarfed by an unexpectedly sharp surge in bad loans that caused its stock to tumble after it reported earnings. Net profit rose 137% to 3,751.56 crore in the three months ended 30 June, largely on account of last year’s low base.

ICICI Bank Ltd reported a 25% rise in consolidated net profit in the first quarter as it earned more on loans. Consolidated net profit rose to 2,077 crore for June quarter from 1,667 crore a year ago.

Tata Steel Ltd posted an 89% decline in consolidated net profit for June quarter hurt by waning European demand, a drop in other income, and the absence of a one-time profit that boosted earnings a year earlier. It reported a net profit of 597.88 crore in April-June, down from 5,346.55 crore in the 2011 April-June quarter.

Reliance Industries Ltd reported a 21% decline in net profit, hurt by a worse-than-expected performance in its petrochemicals business and continued weakness in the oil and gas exploration and production segment.

Its net profit fell to 4,473 crore in the quarter, from 5,661 crore in the same period last year. The profit came on a 13.4% increase in revenue to 91,875 crore, from 81,018 crore in the year-ago period.

“Corporate results will be a mixed bag in the coming quarter as well with pressure on margins and slow growth in sales continuing on year-on-year basis," Jain of Nirmal Bang said. “But we may see some improvement on a quarter-on-quarter basis as the first quarter is comparatively a slow quarter."

vyas.m@livemint.com

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