One can’t recall when ITC last reported a fall in its net profit in any quarter, if at all it did. That was before the June 2008 quarter, when the cigarette major’s bottom line dipped marginally by just over 4 per cent. ITC can afford to lose a sum of Rs120 crore in a quarter, it’s no big deal. It’s not the losses in themselves that are worrying; any start-up venture — in this case food and personal products — needs time to stabilise. What is disconcerting is that the business itself doesn’t seem to be picking up the way one would have expected. To be sure, ITC has mopped up market share and is giving the competition a run for its money, whether in atta, snack foods or biscuits. But 23 per cent sales growth for the branded packaged foods business as a whole, on a low base, is rather disappointing.
To be fair to ITC, these are not the easiest of times to sell to consumers. A glance at the corporate results for the June 2008 quarter shows that, by and large, the top line for most companies has seen momentum and at an aggregate level, therefore, it would appear that demand is not slackening. But a closer look at businesses catering for consumers shows a somewhat different picture. Bajaj Auto, for instance, has seen revenues grow in single digits, on a low base, retailer Trent’s growth has just about made it to double digits while same-store sales at Shopper’s Stop are up just 7 per cent. In some cases it is sheer inflation that has helped prop up the top line — soaring gold prices have inflated Titan’s sales, there have been virtually no increase in volumes. Sun TV has seen disappointing subscriptions, as has Zee Entertainment. And people are not exactly queuing up outside banks to borrow to buy a house or an even a television set.
ITC can sustain the losses for a while. But whether a Dabur wants to lose Rs 40 crore — more than a tenth of its estimated profits for this year — rolling out a retail network is another matter. Or whether a Dish TV, which has already piled up losses of over Rs 400 crore, wants to keep on subsidising set-top boxes is something to think about. Multiplex operator PVR may want to roll out fewer screens at a time when profits are falling. Across companies in the consumer space, start-ups and expansion plans seem to be dragging down profits. That’s partly because costs are rising and partly because there just don’t seem to be enough takers for products or services at higher prices. And prices need to be high if companies are to cover their costs. So while they’re no doubt scaling up the new ventures, it’s probably not happening at the kind of pace it should.
Sure, companies need to expand their portfolios and branch out into related areas but perhaps they could hold on for a while. As the earnings numbers for the June 2008 quarter clearly show, companies are selling but not enough to protect their profit margins. More important, a Citigroup study points out that larger companies appear to be holding out better in a challenging environment while their smaller counterparts seem to be in some amount of trouble. For a sample of BSE 500 companies, net profits have grown at just 6 per cent for the June 2008 quarter, just half the rate of 12 per cent seen in the March quarter. That is not a small drop. In contrast, earnings for a set of bigger firms have grown faster in the June quarter than they did in March. Things could get worse before they become better because prices of essentials continue to rise sharply; after a point consumers will think twice before blowing up money on luxuries. So Titan may actually end up selling less grammage this year, and occupancies at PVR’s theatres could fall more than they already have. Already, Maruti Suzuki hasn’t sold many more cars this July than it did last year and Mahindra & Mahindra has actually sold fewer numbers of its utes.
So this is hardly the time to burn cash, preservation is more like it. Unfortunately, India is becoming a high-cost economy in which real estate, people and now money are becoming unaffordable. Expanding the business at a time like this could jeopardise the core business, which also needs to be supported. And there isn’t that much money going around. So it’s probably a good thing that Shopper’s Stop is stepping off the accelerator — the retailer has decided to roll out fewer stores this year than it had planned. Perhaps others like Arvind Mills, which is attempting to break away from commodity products and foray into value-added segments, will do a rethink on whether it can afford to roll out new stores at this juncture. Broadcasters like Zee need to figure out whether it makes sense to hold on to channels like Zee Next, which has posted a loss of Rs 40 crore. This is no time to fritter away precious resources.
Aug 8, 2008
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