Profits despite slowdown – Proactive companies’ roles

The third quarter results may appear like a journey through a dark tunnel for investors, but there still seems to be a gleam of hope. While most companies have posted poor numbers, a few companies have been able to double their profits.

What is important to note here is that the growth for such companies has come not from sales growth but from operational efficiencies. In some cases other income or extraordinary items have also contributed to the profitability, though such instances are few. Here, we present the five best companies among a sample of nearly 2,000 companies that have stayed afloat in these tough times.

To start with, Tata Communications has shown a whopping 200% growth in net profit in the December’08 quarter. This takes it at the top of the list of our five surprises. It is a small company in size as compared to its counterparts like Reliance Communications (RCom) and Bharti Airtlel. Its incessant efforts to cut its costs have yielded results.

Though the company had been implementing these measures since the last two quarters, profit growth was not visible in the previous quarter, as it paid penalties to FLAG Telecom, an RCom entity. The operational efficiencies would help the company to excel in the coming quarters as well.

Another company that stands out is the engineering giant, L&T. It recorded a 215% year-on-year (YoY) growth in net profit, boosted by the extraordinary income from sale of its ready mix business. Its sales grew at a moderate 30%. The company has forayed into construction activities related to railways and power. This is likely to help the company to beat the slowdown in its other business segments like roads, dams, airport and infrastructure.

Another star performer in the last quarter is BPCL. During the quarter the company had actually shut a part of its refinery for maintenance. This turned out to be a blessing in disguise for the company as it reduced the inventory requirement for the refinery at a time when the crude prices were highly volatile. With a 10% YoY sales growth the company clocked more than one-and-half times growth in profit on a YoY basis. Had it not been for this maintenance work it would have been difficult for BPCL to sustain the high margins.

Defensive sectors like Pharma and FMCG tend to perform better than others during a downturn. This was proven to be true in the December quarter, given the performance of Dr Reddy’s Laboratories (DRL), Unichem Laboratories and the tea company McLeod Russell.

DRL’s net margin was primarily boosted by the exclusivity enjoyed by one of its authorised generic drug. To sustain its growth, the company is also undertaking a shift in its various business models.

In German market, which is changing from branded generic market to a tender based generic market, the company intends to emerge as a high volume, low margin player. In India, the company is changing from a supply-push model to a replenishment-based (demand-pull) model to boost its stagnant business. Similar other strategies would thus help the company to maintain its growth momentum.

Riding on the tea price boom, McLeod Russel India (MRIL) clocked a 61.48% rise in its net profit for the quarter ended December ’08. A strong consumption growth in 2008 in domestic market was the main contributor to this improved financial performance.

Crop shortfall in Kenya up to June of 2008 due to unfavorable weather conditions and rupee depreciation had a positive impact on export prices and export volume. Its export volumes were also high during the nine months of FY08.

In fact these companies barring L&T and McLeod Russell have also outperformed the Sensex in this quarter. Tata Communications and BPCL have gained 8% and 4% respectively during the quarter as against the 26% decline posted by Sensex. Now it needs to be seen if the same can be repeated in the coming quarters.