The second quarter has provided a turnaround for Indian corporates, with profits exceeding market expectations. Higher profit margins and low interest costs boosted the profits in this quarter.
By 4 November, 1,702 companies had declared their results for the July-September quarter. On an average, these companies have seen profits rise by 40.8 per cent. The topline remained robust, with sales growing by 19.6 per cent, against the 0.5 per cent fall recorded in the same quarter last year.
Margins expand: A pleasant surprise was the considerable expansion in profit margins. Net profits, as a percentage of sales, rose from 12 per cent in the second quarter last year to 14 per cent this year. This increase was due to greater operating efficiency.
Higher sales also helped firms achieve economies of scale, improving operating margins. Operating profits, as a percentage of sales, also rose from 19 per cent in the second quarter last year to 20 per cent this year. The improvement galvanised the Sensex, which was struggling to breach the 18,000 mark.
"These results by corporate India have surprised in the way companies across sectors have handled cost pressures to preserve their margins," says Sandip Sabharwal, CEO, portfolio management services, Prabhudas Lilladher. Corporate results in the first quarter had remained subdued due to weak margins.
Even though the top-line rose by 21.8 per cent, profit growth remained poor. At 12.7 per cent, profit growth in the first quarter was only a tad higher than that in the previous year (12.2 per cent). Net profit margin, as a percentage of sales, was 11 per cent, 100 bps lower than in 2009-10. This raised concerns about the ability to sustain profitable growth, resulting in a muted stock market performance.
The Sensex was unable to close above the 18,000 mark and registered a meagre gain of 173 points or 0.98 per cent. The sentiment changed in the second quarter. Even as raw materials and service costs remained at 37 per cent of total sales, interest costs came down by two percentage points.
This, along with robust sales, improved net profit margins. In this period, stock markets registered a gain of 13.4 per cent or 2,368 points and crossed 20,000 for the first time since 2008. Companies in automobiles, banking, IT, pharmaceuticals and capital goods sectors delivered better-than-expected results.