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Turnaround Tales

Post-slowdown, some companies have emerged stronger after seizing the few opportunities on offer

The third quarter of the last financial year was probably the worst for Indian corporates and investors during the whole downturn. Newspapers were constantly flooded with reports about shrinking manufacturing and agriculture sectors, surging fiscal deficit, job losses in private sector enterprises and a falling rupee that touched historically lowest levels. The retail sector, which had been registering growth of over 30 per cent, grew by a mere 10-12 per cent. As a result, gross domestic product (GDP) growth rate of 5.8 per cent was the lowest in any quarter in the last 6 years.

Despairing investors eyed the worsening situation with apprehension. To pump-up slowing credit, which had tapered off after the October, 2008 liquidity crisis), government reduced the prime lending rates many times, but to no avail. The lost confidence in lending markets was not going to be easily restored.

The result was easy to chart on the Bombay Stock Exchange (BSE) 500, which comprises the largest 500 companies listed on the entire exchange and which represents some 93 per cent of the total market capitalization. Out of these, 276 saw a fall in sales in Q3FY09, while a good 316 saw a fall in profits. For 231 companies, both sales and profits dropped.
The June quarter of FY10, however, looked better for India Inc — mostly due to cost-cutting and other business-rationalising activities, net profit margins improved, although aggregate sales were still tight.

As compared to Q3FY09, 295 companies increased profits in Q1FY10. However, when the latter period profits are compared to Q$FY09 profits, 278 companies recorded an increase. Bolstered by the Q1FY10 numbers, Sensex too touched the year’s high.
Some companies that suffered due to poor market conditions in Q3FY09 did take corrective measures and turned profitable in Q1FY10. We came across 9 such companies that made losses in Q3FY09, but turned profitable now. We chart their progress and reasons thereof:

JSW Steel is the largest company in our set . As the global meltdown caught speed in the Q3FY09, steel prices fell and demand dipped drastically. Steel consumption has grown in Q1FY10 and is expected to grow throughout the current fiscal. After a loss of Rs 127 crore in Q3FY09, profit of Rs 340 crore in Q1FY10 was logged. The company also reported a 51 per cent jump in crude steel output.

Tube Investments suffered  losses in its engineering goods segment on the back of a poor automobile sector’s performance as it was not able to pass on rising costs of raw materials to customers. As the automobile sector has recovered, it will bring gains for the company. It reported profits in Q1FY10, but it is still down 41 per cent year-on-year (YoY).

Pidilite Industries reported a net loss of Rs 9.27 crore in Q3FY10. Although input prices started falling from October 2008, procurements were earlier made at higher prices and this, coupled with falling sales, caused the loss. Its profits in Q1FY10 increased by 54 per cent YoY.

Finolex Cables has tripled its net profit YoY in Q1FY10. But Q3FY09 was stressed because of a fall of 36 per cent in net sales. Consequently, the prices of its electric cables, contributing more than half of its sales, were reduced by about 35 per cent, which tightened margins.

Nirma’s sales were higher in Q3FY09 as compared to Q2FY09, but costs increased, creating losses. It has reduced interest costs in Q1FY10, and sales have increased 13 per cent. Its Rs 64 crore profit in Q1FY10 is the highest over past 5 quarters.
Aptech’s total income in Q1FY10 fell 15 per cent compared to Q3FY09, but costs have fallen by over 40 per cent, negating the effect. The rise in profits in Q1FY10 reflects from sale of a China joint venture.

TVS Motors lost out primarily from falling sales, while forex losses affected Radico Khaitan.

Orbit Corporation saw its operating income decline from Rs 292 crore in Q2FY09 to Rs 9 crore in Q3FY09, while its interest costs soared from Rs 1.9 crore to Rs 12.72 crore during the same period. While expenditures were contained, interest costs caused a net loss for the company. When the recovery started, it saw the company’s operating income in the latest quarter revive to a healthy Rs 110 crore and it reported a net profit of Rs 25 crore. It has already been one of the best-peforming  realty stocks in the present rally — it has more than tripled its stock price. The company had recently raised Rs 145 crore through qualified institutional placements (QIP) route.