profits shrink for first 550 cos

 Aarati Krishnan

India Inc is finding it increasingly difficult even to grow its profits, after effortlessly clocking scorching growth numbers over the last few years.

That's the trend emerging from the first 550 companies that have declared their numbers for the October-December 2008 quarter. Net profits of these companies for the December quarter actually shrank by 2.4 per cent, after growing by 17.6 per cent in the same quarter last year.

More than half of the companies that unveiled their numbers reported profit declines and roughly a fourth made net losses. While sales continued to expand by 20 per cent in the December quarter, still-high raw material costs and interest charges were the key villains of the piece.

Interest costs, the villain

Sales numbers from the 550 companies provided little evidence that demand for products or services is skidding to a stop. Sales growth improved to 20.2 per cent this quarter from 15.5 per cent the same period last year. Raw material costs remained high relative to last year and cut operating profit margins to 27.6 per cent (28.3 per cent).

However, a spike in interest costs robbed companies of a reasonable growth in net profits, with interest costs taking away as much as 62 per cent of the operating profits for this sample. The large part played by interest costs in the poor profit picture offers the hope that growth rates for India Inc may still improve, once interest rates begin to move down in response to recent policy moves.

Banks deliver

Both the number of companies reporting profit declines (318) and those declaring losses (157) shot up compared to last year. But select sectors carried the show. Banks, both the PSU and private sector, hogged the list of companies which did manage an acceptable profit growth of 15 per cent or more for the December quarter (over last year).

Banks averaged a stunning profit growth of 53 per cent, followed by large software companies that averaged 31 per cent. Auto ancillaries dominated the list of poor performers, with a few companies slipping from profits into losses.

Cement and automobile companies both reported profit declines, while pharma companies got away with flat profits. But with many less known names among the initial set of companies declaring numbers, these trends may yet change substantially over the next couple of weeks.