Manufacturing profit margins may better ’90s show

 THE manufacturing sector is likely to report a drop in its average net profit margin in 2008-09 to the single-digit-level after two straight years of increase — it peaked to 10.6% in FY08 — as per an ETIG analysis. But on the brighter side, manufacturing firms' profit margins will still beat the 1990s' average, and if the trend of the previous decade is anything to go by, 2009-10 could actually turn out to be much better.
    Over the past 10 years, net profit margins of manufacturing firms have not declined for more than one year on the trot. If this trend continues, then this could mean the worst is behind manufacturing firms, which may improve their bottomlines in 2009-10.
    Indeed, recent reports from various sectors indicate such a possibility. This is because the manufacturing sector is witnessing a drop in raw material costs as metal and fuel prices have fallen significantly and sales have improved, with revival in demand since January.
    The ETIG analysis tracked the manufacturing sector's profitability since 1988-89, the period for which corporate data is available. It factored in financials of around 460 companies and excluded large public sector oil marketing firms, such as IndianOil, Hindustan Petroleum and Bharat Petroleum, whose financials are dictated by government pricing of fuel.
    Although companies are yet to announce their annual results for the year ended March 2009, their net profit margins in the sample stood at 8.5% for the first nine months of 2008-2009. Full-year and nine-month margins have been nearly the same over the past few years, which means manufacturing firms could see a dip in margins to single-digit-levels for 2008-09. Incidentally, the average net profit margin of the same firms in the 1990s was a mere 5.4%.
    In that period, manufacturing sector margins peaked at 8.2% in FY96. After six years of a recessionary spiral, barring FY00 and FY01 when it rose slightly, net margin bottomed out at 3.9% in FY02. It has been on an uptick since then with the exception of FY06. Net margins touched 10.6% for FY08, the highest over the past 20 years. Profit margins stay stable for 3 years
THE aggregate compound annual growth rate(CAGR) in sales for the companies in the sample has been about 15% over the past 20 years, with profits growing at a more robust 22% year-on-year. Over a longer period, the analysis shows interesting cyclicity where net profit margins of manufacturing firms do not go up or down for more than three consecutive years.
    The top companies in terms of revenues — RIL, SAIL, Tata Motors, L&T, Tata Steel, Hindustan Unilever, ITC, Hindalco and Sterlite, show significant difference in movement of profit margins depending upon their sectors.
    For instance, at a standalone financial FMCG firms HUL & ITC had been operating at low profit margins till FY99 which moved to double-digits in 1999-2000 and have stayed above that level since then. On the other hand, metal firms Hindalco and Sterlite, which operated with net margins of 15-20% in the 1990s, have since then fallen to lower levels of 8-10%.