Engineering sector witnesses decline in sales growth
The engineering sector’s worst fears are coming true. The sector, which is seen as a lead indicator for industrial and manufacturing sector growth, has witnessed a decline in sales growth for the quarter ended March 2008 and has taken an even bigg...
By Ashish Agrawal, ET Bureau |
The engineering sector���s worst fears are coming true. The sector, which is seen as a lead indicator for industrial and manufacturing sector growth, has witnessed a decline in sales growth for the quarter ended March 2008 and has taken an even bigger hit on the bottomline.
Interestingly, it is middle-rung firms who have come out with the best financial performance in terms of profitability while small firms have fared poorly and the top firms have grown at par with the
industry average.
While smaller companies are always the first to get impacted in case of a downturn, the slowdown for the larger companies is a bigger concern, as it may mean lower growth for smaller companies, for whom a good part of the demand is derived from larger firms. For the industry as a whole, while sales growth has come down to 19% from an average of 25-30%, the growth rate of net profit has shrunk by more than half to just 13%.
Profit growth during the previous three quarters was in the range of 25-40% and recorded an average growth rate of 51% for 3-year period of 2005-08.
Growth rate is even worse at operating level, with PBDIT rising by only 9%. Furthermore, if we exclude other income, core operating profit growth falls to mere 3.5%. The analysis is based on financials of 146 companies, for which results are available.
Although interest and depreciation charges together have grown at a relatively lower pace of 18%, since it accounts for a small percent of operating profit, the impact on profitability is not significant.
An interesting trend emerges if we look at small, medium and large companies separately. The top companies, with quarterly sales of more than Rs 500 crore, about 15 in number, have shown growth of only 11% in profits, with sales growth nearly equal to the aggregate for the sector. The result is far worse for smaller companies with sales of less than Rs 100 crore. These companies have seen an 8% decline in profits even with 14% growth in sales.
However, mid-sized companies, with sales of Rs 100-500 crore during the quarter, recorded 38% growth in profits, even as revenue growth matched the sectoral average. These companies had no advantage over raw material, the key cost component, but made up with lower increase in staff and other operating costs.
Interestingly, it is middle-rung firms who have come out with the best financial performance in terms of profitability while small firms have fared poorly and the top firms have grown at par with the
industry average.
While smaller companies are always the first to get impacted in case of a downturn, the slowdown for the larger companies is a bigger concern, as it may mean lower growth for smaller companies, for whom a good part of the demand is derived from larger firms. For the industry as a whole, while sales growth has come down to 19% from an average of 25-30%, the growth rate of net profit has shrunk by more than half to just 13%.
Profit growth during the previous three quarters was in the range of 25-40% and recorded an average growth rate of 51% for 3-year period of 2005-08.
Growth rate is even worse at operating level, with PBDIT rising by only 9%. Furthermore, if we exclude other income, core operating profit growth falls to mere 3.5%. The analysis is based on financials of 146 companies, for which results are available.
ADVERTISEMENT
On the cost front, all major cost items have shown significant increases, unlike previous quarters. While raw material and staff cost have grown by nearly 22%, other expenses have grown at 36%. Although interest and depreciation charges together have grown at a relatively lower pace of 18%, since it accounts for a small percent of operating profit, the impact on profitability is not significant.
An interesting trend emerges if we look at small, medium and large companies separately. The top companies, with quarterly sales of more than Rs 500 crore, about 15 in number, have shown growth of only 11% in profits, with sales growth nearly equal to the aggregate for the sector. The result is far worse for smaller companies with sales of less than Rs 100 crore. These companies have seen an 8% decline in profits even with 14% growth in sales.
However, mid-sized companies, with sales of Rs 100-500 crore during the quarter, recorded 38% growth in profits, even as revenue growth matched the sectoral average. These companies had no advantage over raw material, the key cost component, but made up with lower increase in staff and other operating costs.
ADVERTISEMENT
Among individual results, BHEL and Siemens have been a disappointment with decline in profits. However, L&T, ABB and Crompton Greaves outperformed the industry with 35-40% growth in profits.Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
