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.
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.
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.
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