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A mixed bag

The non-financial and the financial segment produced contrasting results in the first quarter of FY11

Corporate results for the first quarter of FY11 were a mixed bag. The non-financial segment and the financial segment of corporate India had very different stories to tell. Out of the universe of BSE 500 companies, 468 companies had declared their Q1FY11 results (at the time of our analysis). In order to get a clearer picture, we segregated non-financial and financial companies and analysed their results separately. We studied 406 companies belonging to the non-financial segment and 62 belonging to the financial segment. The performances of these two segments presented a contrast, as we shall see.

Growing topline. The non-financial segment which includes sectors such as manufacturing, construction, electricity and many more registered a significant growth in its topline. The companies under this segment posted a growth of 19.9 per cent in revenue and 21.9 per cent in net sales in the June quarter compared to the corresponding quarter last year. According to Dipen Shah, senior vice president (PCG Research), Kotak Securities, "Economic growth has picked up. Demand as well as production levels have risen. Hence, volume growth has been good. Moreover, companies have got the pricing power and they have been able to pass on cost increases. These factors have led to volume growth."

However, the picture was a little different on a quarter-on quarter (q-o-q) basis. The revenues of these companies registered a decline of 9 per cent while net sales declined 8.4 per cent q-o-q. As the companies (in this set) belong to different sectors, a variety of factors were responsible for the dent in their performances. According to Shah, "The fourth quarter is always the best quarter for several manufacturing and project companies. Several projects get completed in that quarter. Moreover, for several sectors the last quarter of the fiscal is always the best." Hence, the relatively high base of Q4FY10 was the reason why these companies performed poorly on a sequential basis.

Declining bottomline. The non-financial segment witnessed a drastic fall in its net profits of (-)21.7 per cent year-on-year (y-o-y) and (-)30.9 per cent q-o-q. The major culprit for this poor showing was the rise in raw-material prices on a y-o-y basis. Apart from this, Shah says: "Higher interest expenses that occurred due to higher borrowings, reduction in other income (because of relatively lower liquidity) and forex fluctuations affected net profit growth adversely."

Rising expenses. Raw material expenses as a percentage of net sales rose nearly 5.6 percentage points y-o-y. The impact of raw material expenses was even steeper on a sequential basis: it grew around 6.5 percentage points from March to June 2010. Interest income as a percentage of net sales inched up marginally by 0.3 percentage points sequentially and stood at 2.0 per cent in the first quarter. Interest cost rose mainly on account of higher borrowings to fund expansion plans and to meet corporates' working capital needs.

Shrinking margins. Net profit margin (NPM) and operating profit margin (OPM) of non-financial entities have been continuously reeling under pressure (except in the March 2010 quarter). In the June 2010 quarter, NPM declined by 410 basis points (bps) and OPM by 701 bps y-o-y. On whether the pressure on margins is expected to continue, Shah says: "This will depend on the extent of increase in raw material prices. If raw material prices remain firm, the pressure will continue. We also expect interest costs to remain high as most companies are in expansion mode."

Growing topline and bottomline. The financial segment, which consists of financial services companies, posted a growth of 7.23 per cent in income and 10.7 per cent in net sales y-o-y. Contrary to the case of their non-financial counterparts, the income of this segment grew by only 1.7 per cent while net sales grew by 4.89 per cent q-o-q. However, their net profits rose nearly 25.6 per cent y-o-y and 12.6 per cent q-o-q.

On the overall performance of the financial companies Shah says: "Financial companies delivered robust profit after tax growth on account of higher net interest margin, improvement in fee income which grew around 20 per cent y-o-y, and modest operating expenses which grew at 9-10 per cent y-o-y."

Robust showing by PSU banks. Public sector banks did better than their private counterparts on many fronts. Net profits of public sector banks rose 33 per cent y-o-y as compared to a 25 per cent y-o-y growth in case of private banks. Their net interest income was also robust on account of improvement in net interest margin (NIM) and strong loan growth. Loan growth for public sector banks grew around 24 per cent y-o-y versus a 20 per cent y-o-y growth in case of private banks. Moreover, NIM showed an improvement of about 16-17 bps in case of the former while in case of the latter there was a decline of 25 bps (both on a y-o-y basis). Fee income growth was also stronger at 22 per cent (y-o-y) for public sector banks as compared to 17 per cent (y-o-y) for private banks.

Interest expense as a percentage of net sales declined by nearly 8.7 percentage points y-o-y for the financial segment as a whole.

To round up, the first quarter results were more or less in line with expectations mainly on account of an improved business environment.

  Y-o-Y  Q-o-Q
Revenue 19.93 -9
Net sales 21.94 -8.49
Net profit -21.7 -30.96
Revenue 7.23 1.7
Net sales 10.75 4.89
Net profit 25.6 12.6
Total number of companies = 468 out of BSE 500
Non-financial = 406
Financial = 62 All figs. are in %

  Jun-09  Sep-09  Dec-09  Mar-10  Jun-10
Expenses as a %age of net sales          
Raw materials 59.3 61.4 61.4 58.4 64.9
Interest expenses 2.1 2 1.8 1.7 2
NPM 11.45 9.56 8.9 9.75 7.35
OPM 25.33 21.1 19.79 21.15 18.32
Expenses as a %age of net sales          
Interest expenses 70 67.6 64.1 61.9 61.3
Total number of companies = 468 out of BSE 500 Non-financial = 406 Financial = 62