India’s Top 500 Companies 2008
  
   
 

FY10 – Paving the road for recovery of Top 500 Companies

The Top 500 Companies of this edition have performed well, at an aggregate level, for the quarter ended Dec 2009 (Q3FY10). The numbers for the last seven quarters were collated to study the q-o-q growth trends of the Top 500 Companies. The second and third stimulus packages announced by the government when the economy hit a trough seemed to have played an instrumental role in setting off the economy back on a roll. On its road to recovery, the fiscal 2010 has seen a remarkable recovery in profitability with the net profit margins going up substantially. To get a better perspective on the trends, we have analysed the 500 companies on the basis of q-o-q sequential growth to circumvent the low base effect of the previous fiscal.

It was precisely the Q4FY09 that set the ball rolling with a huge jump in the bottomline with profits ballooning. During FY10, the y-o-y net profit growth was at 20.5%, 41.5% and 30.6% for Q1, Q2 and Q3 respectively. However, as seen in the table, the net profit has decreased or witnessed a minuscule increase on a q-o-q sequential basis for FY10. However, in FY10 the companies have managed to maintain decent NPM throughout the fiscal, unlike FY09 when NPM was the quite low for the initial quarters and suddenly zoomed up in the last quarter (Q4FY09).

For the purpose of analysis henceforth, 433 non-financial companies for whom the quarterly data was consistently available were considered. Additionally, the six oil – refining and marketing companies which account for over a quarter of the total income of 500 companies were excluded on account of the extreme volatility and sharp fluctuation in crude oil prices which coupled with rigid pricing and government control led to wide fluctuations in the topline of oil refining and marketing companies, and subsequently resulting in skewed aggregates.

The below mentioned analysis comprises of 427 companies (excluding financial institution and oil – refining and marketing companies).

Low base effect of Q3 FY09

The moderation in demand, low industrial growth, decline in business confidence, continuous build up of inventories for manufacturing industries added to the woes that came to haunt India Inc throughout fiscal 2009. The numbers for the 427 non-financial companies (excluding oil – refining and marketing companies) indicate that the tough times for India Inc peaked during Q3FY09 with income and profit hitting a trough for quarter ending Dec 2008 (Q3FY09). For Q3FY09 the topline and bottomline saw the worst performance with a decline of 6.4%, 17.3% and 28.9% in total income, operating profit and net profit respectively as compared to Q2FY09 (on q-o-q sequential basis). The y-o-y decline in total income and profit is steeper as the performance slipped to the lowest levels for Q3FY09. To counter the crisis, the government subsequently announced the second and third stimulus packages in Dec 2008 and Feb 2009 respectively. On the back of stimulus support, low base of Q3 FY09, and improving business confidence the numbers did recover and soon returned to the growth trajectory in the very next quarter (Q4 FY09).

For Q4FY09 and Q1FY10 the q-o-q sequential growth for expenses clearly shows a negative growth for major expenses. And this was on the back of a total income increase of 6.6% for Q4FY09 and a decline of 4.7% in total income during Q1FY10. However, the decline in expenses during Q1FY10 was higher than the decline in total income resulting in a better bottomline. The net profit margin (NPM) for Q4FY09 and Q1FY10 stood at 10.2% and 12.4% respectively clearly showing an improvement of more than 200 basis points in the net profit margins.

The changing business environment and the improving consumer confidence did see the total income grow by close to 5% sequentially for each of the second and third quarters of FY10 (Q2FY10 and Q3FY10). But the subsequent increase in raw material expense, salary expenses and other expenses saw the net profit grow by just 1.4 on a q-o-q basis for Q2FY10 and whereas the net profit declined by 2.3% for Q3FY10 on a q-o-q sequential basis. The NPM for Q2FY10 and Q3FY10 was at 11.95% and 11.13% respectively.

Recovery turns to moderately positive outlook for end of fiscal 2010

The quarterly earnings for the fiscal 2010 have been a mixed bag with more positives unlike the previous few quarters. In FY10, the companies have maintained decent net profit margins throughout the first three quarters. Throughout fiscal 2010, these 427 companies on their road to recovery have reported decent growth in total income and profitability.

The earnings season for fiscal 2010 started with a 3.7% growth in topline during Q1FY10 for the 427 non-financial companies excluding oil – refining and marketing companies, whereas these companies reported stagnant growth during Q2FY10. However, the third quarter was a major boost as the 427 companies on an aggregate basis have reported double digit growth figures for most of the major performance indicators on a y-o-y basis.

Oil – refining & marketing companies see wide fluctuation

Despite the contraction in revenues for the oil refining and marketing companies in the first two quarters of fiscal 2010, the operating profit and the net profit improved significantly on a y-o-y basis. The oil – refining & marketing companies were an exception as the companies had extremely volatile revenues due to rigid pricing and government control. The crude prices had hit the roof and trough as well during the same year. The topline for the six oil – refining & marketing companies saw wide fluctuations throughout fiscal 2010 with the total income plunging by 31% and 23% during Q1FY10 and Q2FY10 respectively. However, for Q3FY10, the total income of the six oil – refining & marketing companies rose by 15.4%.

The increase in net profit was significant for first nine months of fiscal 2010 due to low base of fiscal 2009, when the companies reported a wide loss for Q2FY09 and had comparatively minuscule profits for the rest of the quarters of FY09. The decline in crude oil price, coupled with the drastic decrease in interest expenses led to spectacular increase in bottomline for each quarter of fiscal 2010. For the nine months Apr-Dec 2009, the net profit of the oil – refining & companies saw a y-o-y growth of over 36 times, primarily because of a low bas

Construction, textiles and pharmaceuticals lead the way in displaying robust performance

The government’s fiscal stimulus was instrumental in the faster turnaround of companies and in aiding their survival during the slowdown. The companies have seen a dramatic rise in profitability due to the decline in raw material prices, lower interest burden and due to the benefits of cost rationalisation undertaken by companies. On the back of y-o-y growth for total income was at 5% for the nine months Apr-Dec 2009, whereas profit saw a y-o-y growth of 17.3%. The construction and textiles industry reported the highest total income growth of 32.7% and 16.9%, respectively, for the first nine months of FY10, as compared with the corresponding period last year.

The growth in net profit has been faster than the growth witnessed in the operating profit (EBITDA) of almost all industries. Many companies defied industry trends to come on top, while a few companies disappointed. From the graph it is clearly evident that among the most represented and valuable sectors, only the telecom services industry underperformed as its operating profit clocked a negative y-o-y growth of 8.6% due to the direct impact of the ongoing tariff war to woo subscribers. On the other hand, the net profit has grown faster for industries such as oil – refining and marketing, textiles, pharmaceuticals and construction as compared with their growth in operating profit. The decrease in the interest burden of these companies has pushed up their net profit significantly. The decreasing interest rate scenario and the decrease in debt due to repayment or refinance have magnified the increase in bottom-line.

Expected to finish FY10 on a positive note

The 427 non-financial companies (excluding oil – refining and marketing) are expected to finish the fiscal 2010 (FY10) with on a positive note. The operating profit and net profit growth is expected to be higher and profit margins may recover close to the highs seen during the heydays of FY08. The improvement in liquidity and the benign interest environment has subsequently led to decrease in interest burden for FY10. In fact a recovered business environment and better equity markets along with revival of other sources of funding have led to repayment of debt. India Inc has emerged as a winner as its profit margins returned close to normalcy within a year since they hit a low during the last fiscal.

 

 

 

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