Financial Daily from THE HINDU group of publications
Sunday, Sep 22, 2002
Markets - Recommendation
Nifty companies: Struggling to stay ahead
THE report card for the 50 companies comprising the Nifty index for the year-ended 2001-02 indicates that Corporate India has been struggling to pep up demand in the economy. Meanwhile, it has been tightening up its costs and improving internal efficiencies to grow the bottomline. While the topline nudged ahead by a mere 0.43 per cent, the operating profits showed good improvement at 10.30 per cent.
The topline for pharmaceutical and automobile sector posted decent growth rates, while the core sector represented by cement, steel, power, engineering and refineries struggled. The new economy stocks (IT and Telecom), posted a more modest 6.48 per cent growth compared to its robust two-digit growth in the earlier years. The sector was pulled down primarily by NIIT and VSNL, both struggling under the changing business scenario. Ignoring the two companies, the aggregate growth for the sector works out to 18 per cent. While the tech slowdown affected NIIT's education business, the opening up of the telecom sector exposed VSNL to cut throat competition, pulling down its revenues by over 10 per cent.
Stress on efficiency
One positive fact is that, across sectors, companies have squeezed operating expenses and improved operating efficiency. Barring economically-sensitive core sector companies, for all other sectors, the growth in turnover surpassed the growth in expenses. The high fixed expenses incurred on account of low capacity utilisation levels restrict the ability to tighten costs for core sector companies. While the operating profit for the core sector just inched up by 0.32 per cent, that for refineries actually dipped by 1.64 per cent.
The operating profits jumped 43.8 per cent for automobile companies closely followed by pharma sector at 39.58. This was primarily due to the turnaround of Tata Engineering, whose operating profits jumped by 87 per cent. Reduction in material cost, rationalisation of workforce, better working capital management and supply chain management (in case of FMCG companies), all contributed to the overall rise in operating profit margins by 164 basis points to 18.24 per cent for India Incorporated.
A reduction in interest costs (by 11.12 per cent), and the absence of steep rise in depreciation costs (3.20 per cent rise) further boosted profits before taxes by16.68 per cent. The lower interest rate regime had its impact on the interest income of financial institutions, which decreased by 5.25 per cent. However, a generous helping from alternative sources of income and a 27 per cent reduction in other operating expenses pushed up the operating profit by 36 per cent for the financial sector.
The gains made on the operational front were to a large extent brought down by a steep increase in taxation and provisions. The sustainable profits (profit after taxes but before extraordinary items) rose only by 6.96 per cent as against profit before taxes, which rose by 16.68 per cent.
The increase in taxation was due to the accounting for deferred tax liability introduced from the year 2001-2002. A steep increase in provisioning (by 60 per cent) by financial institutions and banks is also responsible for the decline in sustainable profits.
Generous helping from one-time items coughed up the profits at the net level to a large extent. Income from extraordinary items added Rs 432 crore to the bottomline, while it drained Rs 294 crore from profits in the previous year. This includes Rs 358 crore coughed up by Reliance Industries for the sale of its stake in L&T.
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