Time To Bust Out The Bubbly?

CORPORATE RESULTS
Time To Bust Out The Bubbly?

Pop it back in. A BT study shows that sales were up in 1998-99, but CEOs didn't know how to turn them into profits.

By Rajeev Dubey

What's gone and what's past help should be past grief.
William Shakespeare, The Winter's Tale

Not, dear Bard, when corporate India always has a beef. Even a quick glance at the 1998-99 results of 1,369 companies reveals that a profitable recovery-however feeble-was well within their grasp last year. In other words, there was a distinct improvement in demand. Why, then, was corporate India unable to seize the moment to profit? Blame it on Total Expenses and Interest Outgo. The bottomline: corporate India was unprepared for a recovery. Worse, it was, and is, inefficient. Agrees S. Sandilya, 50, Managing Director, Eicher Motors: ''Demand was encouraging, but margins were tight. Hopefully, a complete revival is not far away.''

Riding high on a growth in sales of 11.20 per cent-as opposed to 8.65 per cent in 1997-98-India Inc.'s hopes were dampened by increases in Interest Outgo (16.82 per cent) and Total Expenses (12.24 per cent). Sure, the latter does move in tandem with sales. But the increase in interest payments can only be attributed to an unexpected spurt in demand. Which forced corporates to resort to short-term borrowings to meet their working capital-requirements. Agrees U.R. Bhatt, 47, Director, Jardine Fleming India Asset Management: ''The higher interest on short-term borrowings may have caused interest expenses to rise during the year.''

But the impact on bottomlines was devastating. Even though Other Income grew by 10.84 per cent, corporates could not salvage their dipping profitability. And the net profits of the sample registered a negative growth of 5.95 per cent (15.06 per cent in 1997-98). Only 735 companies could register an increase in profits. Sure enough, the sample's net profit margins crashed from 7.10 per cent in 1997-98 to 5.99 per cent in 1998-99. Points out V.R. Janardhanam, 57, President, Sundaram Brake Linings: ''Wild fluctuations in demand characterised industry's low profitability.''

Of the 27 sectors that made up the sample, only 11 recorded a positive growth in net profits: between 3.24 per cent (tea) and 71.49 per cent (infotech). What is worrying is that 16 sectors experienced a dip in profits-ranging from -2.98 per cent (automobiles) to -395.20 per cent (steel)-over 1997-98. At the micro-level, Indian Oil Corp. recorded the biggest growth in net profits of Rs 507.02 crore to Rs 2,213 crore. And Steel Authority of India, another public sector company, was among the largest losers, reporting a net loss of Rs 1,573.66 crore in 1998-99 as against net profits of Rs 132.99 crore in 1997-98.

If bottomlines took a beating, sales didn't. Actually, the sales of 826 companies rose in 1998-99 while those of the remaining 543 fell. Moreover, this was across a wider bandwidth of sectors-a silver lining of significance. Of the 27 sectors BT tracked, 10-including petroleum, finance, pharmaceuticals, and consumer non-durables-showed excellent improvement in sales, ranging from 9.07 (power) to 33.09 per cent (infotech). Another 11-including consumer durables, transport, textiles, and petrochemicals-showed low to moderate sales growth, ranging between 0.37 (services) and 8.70 per cent (sugar).

Topping the list was the State-owned Bharat Petroleum Corp., with a sales growth of Rs 9,766.80 crore, to Rs 21,600 crore. But 6 sectors-cement, engineering, steel, other metals, minerals, and trading-queered the pitch by recording negative sales growth ranging from -1.31 (cement) to -8.86 per cent (minerals) during 1998-99. In fact, the State-owned trading company, STC, was the biggest loser in terms of turnover, with its sales falling by Rs 1,028.12 crore to Rs 1,885.78 crore in 1998-99.

That brings us to the 5,000-point question: can India Inc. hope for a revival in the first financial year of the New Millennium? Answers Sunil Bhandare, 45, Chief Economist, Tata Group: ''Although demand is improving, margins are still under pressure. A profitable recovery is yet to happen.'' There is a faint glimmer of hope from 2 key sectors: steel and cement. With the GOI having now fixed a floor-price for steel-$302 per tonne for hot-rolled coils and $371 per tonne for cold-rolled coils-the loss-making multitudes in this sector can raise prices and, thereby, margins. For cement, a sector in the throes of consolidation, prices are up in the South and North. Chips in Sridhar Iyengar, 52, Chairman, KPMG Peat Marwick: ''There is an increase in the demand for consultancy on process-improvements. And there's a general impression that it cannot be worse than the current situation.''

Let us consider what Q-4, 1998-99, had in store for corporate India: although sales grew by 9.58 per cent over Q-3, a 79.09 per cent surge in Other Income helped the sample record a 26.48 per cent growth in net profits. Warns Manishi Raychaudhuri, 31, Equity Research Analyst, ICICI Securities: ''High Other Income growth at the close of the year is only to be expected because it helps corporates boost bottomlines before the close of the year.'' True; companies usually book Other Income in the second and fourth quarters.

That, perhaps, explains why, in terms of profitability, Q-4 was better than Q-3. In the last quarter of the previous year, as many as 18 sectors showed positive growth in net profits, ranging from 2.38 (petrochemicals) to 605.45 per cent (engineering) over Q-3, 1998-99. And the laggards ranged from -1.06 per cent (consumer non-durables) to -95.35 per cent (cement).

So, the BT Corporate Profits Forecast continues to be grim. India Inc., still in the throes of a painful restructuring, is not fit enough to take advantage of even the slight increase in demand. Not only does that mean that companies are far from being lean-n'-mean, they are also displaying a lack of foresight, initiative, and confidence. As corporate India is discovering, these attributes are necessary in good times-and, in bad times, could be crucial.

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