Profitability of corporate India set to improve: CMIE

Improvement in performance of the manufacturing sector is expected to boost the profitability of corporate India this year, according to Centre for Monitoring Indian Economy (CMIE)."We estimate net profits to have grown by a whopping 111.9 percent in September 2012 quarter compared to the preceding quarter," the CMIE reported.

"The net profit margin too is expected to have bounced back strongly to 7.4 percent, after dropping to a 14-year low of 3.3 percent in the June 2012 quarter," CMIE said in its monthly review in Mumbai.

"We expect profitability to improve further to 7.9 percent in the December 2012 quarter and 8.7 per cent in the March 2013 quarter," the economic think-tank said. The improvement in corporate profitability will be driven by the manufacturing sector, which had slipped into losses in the June 2012 quarter and had pulled down the profitability of corporate India dramatically.

The poor performance by the manufacturing sector was mainly attributed to the huge mark-to-market losses incurred by various companies on their short-term foreign currency liabilities following sharp depreciation of rupee and non-compensation of under recoveries to the oil marketing companies by the government, it said.

However, things have turned favourable for the manufacturing sector on both the counts from the September 2012 quarter and the corporates are unlikely to have incurred forex losses as the rupee appreciated by 6.9 percent since June 2012.

As a result, other expenses, which comprise forex losses of the manufacturing sector are expected to have fallen to 8.4 percent of sales in the September 2012 quarter from 12 percent in the preceding one.

"We expect the government to declare a subsidy of Rs 30,000 crore for the oil marketing PSUs-IOCL, HPCL and BPCL in the September 2012 quarter towards compensation for the under-recoveries incurred by them during April-September 2012," CMIE said.

In the past, whenever the government has skipped announcement of subsidy for a quarter, it has provided a cumulative subsidy in the following quarter, it said.

"We expect the same to happen in the September 2012 quarter. The oil subsidies directly add to profits of the OMCs and consequently to profits of the manufacturing sector," it added.

The sequential improvement in the profitability of the manufacturing sector is expected to be so strong that in spite of the mild contraction in the profitability of the financial services and the non-financial services sector, the overall profitability of corporate India will show a substantial improvement, it said.