Turning a profit is what business is all about both for the companies concerned and for investors - for the former this is the primary source of generating funds for operations, plus profit, while for the latter this translates into gains. And that depends on goods and products being sold at a price that is much higher than the amount being spent on making them.
Consider this. A company sells its product for Rs 5 per unit. It has a fixed cost of Rs 1,000, produces 500 units by incurring an additional cost of Rs 1,000 and earns Rs 500. By incurring a cost of Rs 2,000, it increases its sales to 1,000 units, earning Rs 2,000. What the company earns after factoring in sales and other expenses is Operating Income. In short, it is excess of net sales over operating expenses.
A quick understanding of the company's profitability can also be seen through Operating Margins, i.e. ratio of operating profit and net sales. In our example, the operating margin of the company increased from 20 per cent to 40 per cent. A high operating profit margin indicates the company's tight control over costs and/or that sales are increasing faster than costs, which is an optimal situation. This also enables the company to deliver goods to customers at much cheaper prices than competitors.
We looked for companies which increased their sales in the past two quarters, along with improving operating profit margins. Here are those that survived our screenings.
Motherson Sumi Systems is an automotive wiring harnesses and mirrors manufacturer for cars, and is also a supplier of plastic components and modules to the industry. It has a 65 per cent marketshare for wiring harnesses, and 48 per cent for rear view mirrors.
Maruti Suzuki worked out a new way of manufacturing small parts from the scrap metal it was generating without compromising on safety. Increasing its market share in the lean period also helped it double its operating margins.
Amtek India, an auto-parts manufacturer, it is the smallest company in our group by net sales. With markets recovering, it has improved its net sales for the December, 2009 quarter, which were 40 per cent higher on a YoY basis. Operating profit margins, after dropping in June, 2009 quarter recovered in December, 2009 quarter.
With operations in Gujarat and Maharashtra, Torrent Power generates, transmits and distributes electricity. The Gujarat operations contributed 82 per cent of the revenues in FY09.
A debt-free company, Mahindra Lifespace Developers is a part of the Mahindra Group, and is primarily a premium residential property developer in the Tier I and Tier II cities. The brand name puts it in a position to command a significant premium.
Sobha Developers is the largest real estate developer in South India. It has Rs 89 of debt for every Rs 100 of equity capital.
Bilcare is a leading provider of research-driven packaging solutions, anti-counterfeiting technology and clinical services. Its presence adds value to pharmaceutical companies, helping them accelerate drug development life-cycles.
Greaves Cotton is a diversified engineering company with a presence in diesel/petrol engines, gensets, agro equipment and construction equipment. The company is moving ahead with overseas tie-ups to streamline and optimize its product development processes.
A Vedanta Group company, Sterlite Industries, is India's largest non-ferrous metals and mining company. Its business is spread across copper, aluminium, zinc, lead and power. Held by Sterlite Industries to the extent of 65 per cent, Hindustan Zinc is the monopoly producer of zinc in India. As steel companies, the biggest consumers of zinc, are experiencing a revival in demand, benefits accrue to Hindustan Zinc as well.
Asian Paints is the market leader in the domestic paints market. It, however, reported a 30 per cent drop in net profit in the December quarter.
A diversified business house, ITC is the market leader in cigarettes, hotels, paperboards, packaging and agri-exports. The cigarettes division contributed to almost 45 per cent of the net sales in Q3FY09. But the company has many opportunities to expand in other businesses.