India Inc companies see contradictions; net sales decline but net profits rise

India Inc's second quarter earnings are displaying a contrasting trend, with revenues and profits of the companies taking opposite directions due to weak demand and a sharp fall in the global commodity prices.

The earnings data for September quarter, available for 622 companies, showed that their net sales in the quarter fell 4.4% on an annual basis, recording the second lowest figure in the past eight years.

On the other hand, adjusted net profit of the companies went up by 7.7%, posting the fastest growth in the last four quarters and showing a divergence with net sales, Business Standard reported.

The primary reason for the decrease in net sales is a fall in petroleum products' prices. This is evident from excluding Q2 earnings of oil and gas sector's four companies -- Reliance Industries, Cairn India, MRPL and Petronet LNG - from the sample -- which would have resulted in net sales going up by 4.9% and net profit by 10.1%.

To get a clearer picture of Q2 results, Business Standard analysed the operations of 505 companies from the real sector (excluding oil and gas and financials), which showed that net sales rose 2.4% and net profit by 7%. The core-operating margins of these companies touched a 23-quarter high of 18.9% of net sales.

Profit growth would have gone higher in the absence of "rising interest burden" for the companies. Finance cost, which increased by 10.1% in the July-September quarter, remained as "one of fastest growing cost head for companies".

Apart from the decline in oil prices, a crash in prices of other commodities resulted in net sales growth and net profit growth taking opposite paths.

"There has been a marked decline in raw material and energy cost especially in the manufacturing sector but companies have passed on only a part of their cost savings to customers. This has expanded their margins and partly explains the divergence. Secondly, a fall in commodity prices has depressed top line for commodity producers pulling down the overall top line growth," said Swati Kulkarni, executive vice-president and fund manager-equities at UTI AMC.

Some analysts said that it would be difficult for the companies to maintain the current growth rates of profits "unless there is a secular demand growth in the economy".

"Boost from commodity prices would wear off in the next one or two quarters unless demand growth picks up. A sustained rise in earnings requires strong growth in the economy but it looks doubtful at the moment," said a senior analyst with a foreign brokerage, requesting anonymity.