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Sunday, July 08, 2001













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S&P CNX Nifty -- Nifty cos, faulty showing

Krishnan Thiagarajan

A COMPARISON of the financial performance of 50 companies represented by S&P CNX Nifty in 2000-01 and 1999-2000 mirrors the depressed state of Corporate India.

With the core (such as engineering/capital goods and automobiles), commodity (such as steel and petrochemicals) and the fast moving consumer goods (FMCG) sectors in the doldrums, the earnings were bound to be uninspiring. The prop provided to the earnings number by the infotech, petroleum and pharma sectors was not sufficient to lift the gloom in the economy. In the wake of the US slowdown, it is becoming evident that the support offered by infotech and pharma will also go, further compounding the woes of the economy in 2001-02.


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The following trends were in evidence from the aggregate financial picture of Nifty companies in 2000-01 compared to 1999-2000:

*Sales and expenditure: Sales for the Nifty companies was up 34.5 per cent in this period. Prima facie, this is a fairly impressive growth rate. But it represents a skewed picture as it takes into account the extraordinary performance of the software sector (outstripping the average growth rates) and the inclusion of Reliance Petroleum whose mega refinery began commercial production in 2000-01. If we ignore Reliance Petroleum and software companies (Infosys Technologies, Satyam Computers and NIIT) from the Nifty universe, the sales of Nifty companies grew only 18.2 per cent.

However, expenditure has outpaced the growth in sales, rising by 37.3 per cent. Even after ignoring the performance of Reliance Petroleum and software companies, the expenditure growth at 20.5 per cent has run ahead of sales growth. The sharp surge in expenditure has reined in operating profits which grew only 17.1 per cent for the Nifty as a whole and by only 2.5 per cent for the remaining sample.


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*Interest and other income: The interest cost for the Nifty companies as a whole surged 53.2 per cent. Even after ignoring the substantial interest cost of Reliance Petroleum, it jumped by 27 per cent. To some extent, the surge in interest cost is probably a combination of the poor credit quality of corporates and higher working capital requirements due to the higher inventory carrying cost and longer debtor turnover cycles.

The `other income' component perked up, but only marginally by 6.3 per cent for the Nifty as a whole. To a large extent, this was expected in a depressed corporate environment as companies with no major investment proposals sought to bolster post-tax earnings through other sources. The surge in interest cost, alongwith a modest rise in `other income' contributed to a 3.1 percentage point drop in gross profit margins of the Nifty as a whole.

*Depreciation: Depreciation charge, normally a sign of a pick-up in industrial activity, does not seem to have shown much of an improvement over the past year. While the depreciation charges rose 36.3 per cent, it inched up only 3.06 per cent from 3.02 per cent if depreciation is compared as a percentage of revenues for 2000-01 and 1999-2000. This indicates that Nifty companies have not made any significant investment in commissioning new projects/expansion activity. This will continue to remain a major cause for concern for Corporate India.

*Taxes/provisions: In line with the sluggish state of the economy, the taxes/provisions have not exhibited any buoyancy, crawling upwards only 4.3 per cent. A combination of a sharp rise in expenditure and high interest costs have taken a toll on the post-tax earnings, which inched up 3.6 per cent. However, if we ignore the performance of Reliance Petroleum and software companies, the post-tax earnings have declined by a whopping 32.7 per cent, reflecting the underlying picture of the economy.


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