Shrinking margins have taken the sheen off buoyant sales growth reported by early birds - the 137 companies that have declared results so far for the second quarter ending September 2008.
Sales grew 29.7 per cent from a year-ago period, but net profit was up only 16.5 per cent. Net profit growth would, in fact, have declined but for information technology and engineering firms, which posted a robust 30 per cent profit growth rate.
Quarter-on-quarter, however, sales growth is lower (34 per cent in the first quarter) though net profit growth is higher (5.7 per cent in the first quarter).
Margins remain a major concern owing to a sharp 122 basis point rise in the cost of production. As a result, operating margins declined 165 basis points to 20.37 per cent year-on-year. They were up 84 basis points quarter-on-quarter.
Interest cost was the main worry for companies that have foreign currency loans through external commercial borrowings and foreign currency convertible bonds.
Companies such as Larsen & Toubro, Jubilant Organosys and Electrosteel that borrowed through FCCBs reported a significant increase in interest cost on account of the mark-to-market losses on these instruments. The interest cost of firms studied here rose 82 per cent - the sharpest increase in the past few quarters.
Given the small sample, it may, however, be too early to draw a trend. But the results of front-line companies like Infosys Technologies, Satyam Computer and Larsen & Toubro and second-rung firms such as Jubilant Organosys, Biocon, Chettinad Cement, Mysore Cement and Prism Cement suggest that technology and engineering firms may outperform the rest of the corporate sector. Cement and pharmaceuticals could be the laggards. Falling prices and higher energy and transport costs have resulted in a significant fall in profits for the cement industry.
The impact of one-time gains was also visible. Many of the results would have been different if adjusted for extraordinary items. For example, Infosys' net profit growth would have been 26.8 per cent instead of 30.2 per cent if it was adjusted for a tax reversal of Rs 31 crore (Rs 51 crore for the same period last year) and a Rs 71 crore write-back on net excess profit for overtime payment to California employees. Similarly, HDFC, which reported a 32 per cent rise in net profit, had a Rs 313 crore one-time profit from a stake sale in Intelenet Global.
A few companies could, however, see net profit go up if adjustments were made for unrealised losses on FCCBs due to exchange rate fluctuations.