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In Q4FY10 revenue growth was up but margins came under pressure

India Inc's growth story is on track. Though corporates may not have performed well on all parameters in Q4FY10, their efforts to grow their revenues paid off handsomely.

The story so far
If we look at the table (Robust top line growth), income and net profit growth have exhibited significant ups and downs in the four quarters of FY10 on a year-on-year (y-o-y) basis.

Q4 snapshot
High revenue growth. The 290 companies of BSE 500 whose Q4 results have been declared managed to post 25.8 per cent growth in income y-o-y. This is 10 percentage points higher than Q3 y-o-y growth, indicating robust revenue growth in Q4.
Net profit growth dips. Net profit grew 22.3 per cent y-o-y in Q4. Though good per se, it marks a decline of 13.7 percentage points compared to Q3 y-o-y growth. The Q3FY10 growth in net profit was high because of the low base effect of the previous year. Remember that in Q3FY09 the global crisis was at its peak. Things had begun to improve by Q4FY09. When you keep this in mind, the Q4FY10 growth number is not bad.

Shrinking margins
Margins, which reflect a company's operating efficiency and profitability, are a cause for slight disappointment. Both operating profit margin (OPM) and net profit margin (NPM) have been continuously under pressure during the four quarters of FY10. The OPM has shrunk from 39.1 per cent in QlFY10 to 32.9 per cent in Q4FY10, a decline of 6.3 percentage points. Similarly, net profit margin shrank from 11.8 per cent in Q1FY10 to 10.7 per cent in Q4FY10, a decline of 1.1 percentage points over the same period. “Margins were under pressure because input costs have gone up for most companies. Margins are expected to remain under pressure in the coming quarters, especially for manufacturing units whose chief inputs are commodities,” says G Shyam Sundar, vice president, CIL Securities.

Rising expenses
Total expenses as a percentage of income grew by a nominal 0.52 percentage points between the first and the fourth quarter of FY10, but then their absolute level is already quite high (88.92 per cent in Ql and 89.44 per cent in Q4FY10). Raw material expenses as a percentage of income grew by around 3.28 percentage points during the period. This was compensated for by interest as a percentage of income declining 5 percentage points over the four quarters.

By and large, Q4FY10 results have been in line with expectations. “Good economic growth helped corporates register robust top line growth, and led to increased capacity utilisation,” says Abbas Merchant, senior assistant vice-president, research, Jaypee Capital Services. As for the future, he says that results in Q1FY11 are also expected to be robust, given the strong growth momentum within the domestic economy. “A few sectors that are exposed to global factors may face some problems,” he adds.

The story first appeared in the June 2010 issue of Wealth InsightThe story first appeared in the June 2010 issue of Wealth Insight