Sample of 338 core sector companies reveals their Q2 sales, net profits fell on slack demand

ET Intelligence Group: Though India Inc’s quarterly performance at the aggregate level seems to be bottoming out over the past three quarters, it masks the pain of the core sector companies.

According to ET Intelligence Group’s analysis, aggregate sales, operating profit and net profit of 338 companies from core sectors fell in the September 2015 quarter, making it the third consecutive quarter of dismal show. In addition, the sample spent half of the operating profit to service debt reflecting the stretched balance sheets amid sluggish business momentum.

Since the performance of core sectors is a leading indicator of the trend in the overall economy, a dismal show by this group indicates that a turnaround in the economy may take longer than expected.

The sectors in the sample include capital goods, cement, construction, metals, mining, and power. A majority of companies in these sectors are facing slack demand for the past several quarters. In the September quarter, the sample’s net sales fell year-on-year by 5.5% while net profit dropped by 7.1%.

Operating profit skidded 12.6%, which was steeper than the drop in sales, reflecting pressure on margin. Operating margins contracted by 70 basis points to 16.3% compared with the corresponding period of the previous fiscal.

The picture was a bit more benign for the broader sample of over 1,800 companies across sectors excluding banking, finance, oil and gas. Net sales of this sample rose by a modest 1.5% and net profit by 1.6%. Operating profit was down by 2.3%.

What’s making matters worse for the core sectors is the rising burden of debt and, therefore, the increasing interest outgo. Companies in these sectors expanded capacities over the past few years by borrowing funds in anticipation of an economic recovery. However, such a recovery is taking longer than expected thereby resulting in tepid sales growth.

This increased the interest outgo of the sample as a percentage of profit before interest and tax ( PBIT) to 50.4% in September quarter.