Corporate profits surged 15% in Q2 of FY14: Assocham

Net profit of corporate in India rose 15 per cent year-on-year in the second quarter of the financial year (July-September 2013-14), reveals a study on corporate performance by the Associated Chambers of Commerce and Industry (Assocham).

According to the study, with cheaper loans reviving consumer durables demand, corporate profits could rise even higher.

The rate of growth in corporate profits, however, has been lower compared to the rate of growth in profits in the previous financial year, the study noted.

Assocham has sought a lowering of interest rates to facilitate flow of funds to the productive sectors of the economy in light of lower margins and rising costs of production.

''There has been a marginal year-on-year decline of 1.8 per cent in the rate of growth of net profit, mainly due to slow macroeconomic conditions both domestically and globally,'' according to an eco-pulse study titled, 'Performance Trends of India Inc in 2013: Q2,' conducted by Assocham Economic Research Bureau (AERB).

This, according to Assocham, has been made possible through reductions in expenditure and savings in costs. Bigger companies also benefited from lower cost of raw materials.

''Substantial cut in total expenses has resulted in limited moderation in profits and though there has been a decline in both expenditure and sales, the rate of decline in expenditure is higher than rate of decline in sales which led to this meagre 1.8 per cent fall in total profits,'' the study pointed out.

It said, ''Though the general trend indicates that both top lines and bottom lines of corporate India either remained indifferent or have shown a mellowed performance. However, certain firms across sectors remained unfazed and successfully weathered the slow economic conditions to register impressive growth figures.''

''Large Indian corporate firms have benefited by cheap imported raw material as raw material prices remained down in global markets, besides low cost of credit raised in foreign markets has also proved lucrative for them,'' DS Rawat, secretary general of Assocham, said while releasing the chamber's study.

''However, rupee depreciation against major currencies on one hand negated certain positive effects in case of import dependent firms and on the other it also favoured export-intensive units.''

While growth in net sales declined by about two per cent Y-o-Y, the cost of raw materials also dipped as companies have adopted efficient cost-management systems. Besides, interest payments have also gone southwards, further highlighted the Assocham study.

While the manufacturing sector continued to stay under pressure with net sales dipping from 14 per cent to 12.8 per cent, growth in total expenditure declined from 15.8 per cent to 11.8 per cent and profit rates have declined by 3.9 per cent during the aforesaid period.

''The underlying explanation is that as borrowing of firms increased, interest payments too increased by 13.8 per cent.''

The Assocham study has highlighted a very moderate uptick in net sales of service sector where total expenses have also increased.

Since services sector performance is linked to industrial activity, there has been continued moderation in growth of net sales in the recent past thereby indicating poor domestic industrial sector performance and uncertain global economic conditions.

''There has been healthy growth of over 33 per cent in the quarter up to 30 September as compared to 24.7 per cent a year ago, which is explained by price realisation and exchange depreciation.''

The banking and financial services sector registered a declining trend in growth rate of net sales.

The segment also witnessed a fall in the rate of growth of interest payments, while growth rate of profits for the sector reduced from 24.8 per cent to 22.1 per cent.

The information technology (IT) sector has shown some immunity to the current slowdown as the sector witnessed rise in net sales growth from 27.6 per cent to 33.5 per cent. The sector also recorded a rise in total expenditure from 24.8 per cent to 30.8 per cent.

While growth in interest payments has become negative, growth rate in total profits recorded an increase from 25.3 per cent to 37 per cent, according to the Assocham study.

Assocham has strongly recommended a paradigm shift in government's approach as cheap imports of various manufactured goods like electronics, chemicals and steel are resulting in domestic manufacturers to lower capacity utilization rates, leave alone adding new capacities.

''The need of the hour is to announce a short term policy action to address current sectoral growth hurdles, besides various governments and ministries must act in unison to put together effective policy measures to address this phenomenon,'' Rawat said.

Rawat added, ''Both the government and monetary authority need to focus on boosting manufacturing sector as that is the only feasible solution for the current state of economy.''

''The Reserve Bank of India (RBI) must ensure availability and cost of finance to end-user become competitive without any further delay, besides swift policy action for reviving investments and business confidence must be initiated to ensure a strong supply response,'' further said the Assocham secretary general.

''The upcoming quarterly monetary policy review must not resort to interest rate tightening, as it would further push up the prices,'' he added.