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Today investors cannot complain about lack of information. On the contrary, with the quarterly results becoming a norm, investors are flooded with a deluge of information. But what should an investor focus on - the year on year results or the quarter on quarter results - What if they show conflicting trends? One shows a revenue growth and the other a profit growth, which is more important or indicative of a trend?

Obviously the best would be to have both. That would denote true growth at every level - both profits as well as revenues. But what happens if we have one and not the other, whether for the whole year or for a quarter. Then how should an investor interpret the same? Is the result an indication of the unsustainability of profits which will carry into the coming quarters or is it just a trend that the industry follows, or some accounting format adopted by the industry or the company as a whole? Reading just Q-on-Q results is no rocket science and should be interpreted keeping the industry trends and scenario in mind, otherwise it could lead to some misleading conclusions.

For instance if one looks at the Q4 results of the pharma companies they show that the that revenues outpaced profits. Pharma companies had mixed fortunes during the fourth quarter (Q4) ended March 31, 2001, with profits failing to keep pace with revenue growth. A study of 63 pharma companies' performance during Q4 shows that when compared with the corresponding quarter of the previous year, while revenues grew by 13.4 per cent, net profit rose a mere 1.6 per cent. This is in contrast to the whole year`s performance, when aggregate net sales grew by 10.46 per cent and net profit by 15.64 per cent.

A closer analysis into the results declared reveals that normally Pharmaceutical sales follow a cyclical path, with the sales peaking in the July-September quarter and hitting a trough in the January-March quarter. The rationale for the trend is the greater prevalence of diseases during monsoons. In tune with the net sales trend, the net profit also follows more or less a similar cyclical path. Comparing the Q4 of 2001 with Q4 of 2000 shows that net Sales and PAT Trend (in Rs crore) The aggregate net sales of 63 companies for the January-March 2001 period rose to Rs 2,618.6 crore, from Rs 2,309.6 crore posted in the January-March 2000 quarter. The net profit during January-March 2001 was, however, much lower at Rs 248.2 crore. Growth trend of net sales and PAT Y-o-Y (in %) indicates that in Q4 2001, profitability growth took a beating. In the previous three quarters, profits were higher than revenues when compared with their respective corresponding quarters of the previous year. The subdued profit growth is mainly because other income during the year fell by 10.7 per cent, while total expenditure rose in line with sales growth, dampening growth in operating profit. A 40.6 per cent growth in tax outgo also depressed the net profit.

However the performance for the quarter on the margins front is definitely a cause for worry. The operating margin at 18 per cent is lowest among all four quarters of FY 2001. The Operating Margin Trend (in %) and the net margins show a similar trend. At 9.5 per cent, the net profit margin (NPM) is the lowest amongst the four quarters of FY 2001. Margins have come under pressure as expenditure costs have increased. So a careful reading of the Q4 results reveals that though the industry is more or less following the a pre established trend, there is cause for concern due dampened margins as a result of a rise in expenditure. Whether or not this trend will spill out into the coming quarter will be revealed only by a study of what made the expenditure rise-was it research costs (in which case the Q1 for 2001-02 will shows the margins bouncing back), or was it rise in input prices for certain specific companies (in which case those companies margins may not bounce back).

In contrast a study of 38 FMCG companies, which have declared results for the March quarter, shows that though they have not shown good topline growth, they have managed a healthy bottomline growth. The aggregate net sales has grown by 6.4 per cent year-on-year (YoY), but the aggregate net profits has risen around 27 per cent YoY. However, it is to be noted that as the FMCG giant, HLL contributes around 57 per cent to the aggregate sales of our sample, the performance of HLL has significantly influenced the industry average. However some conclusions can be drawn on the basis of the results declared. For instance-there is no doubt that slowdown in agricultural and industrial growth, the stock market scam, political uncertainty, and last but not the least natural calamities like the earthquake in Gujarat, have taken its toll on the FMCG sector. Segment-wise performance shows that the deceleration of growth has been sharper in segments focused on the rural economy, such as toilet soaps and detergents. On the other hand, niche segments like skin cream, beverage, shampoo, mosquito repellents, scourers, chocolate and coffee have done well. Though the companies are finding it difficult to sustain good growth, lower raw material cost has helped them improve their margins. The operating margin has improved by 180 basis points to 15.4 per cent YoY. The net margin has also improved by 160 basis points to 9.5 per cent YoY. Another factor that has helped companies show a good bottomline is the decrease in the interest expenses. The aggregate interest expenses for the companies in the sample has decreased by 13 per cent YoY.

The quarter-on-quarter comparison presents a disappointing picture. Net sales have dipped by 0.8 per cent, while the dip in net profit is higher at 22 per cent. The margins have also come under pressure when compared with the October-December 2000 quarter. In the previous quarter, the industry had an average operating margin of 17.9 per cent. What emerges is that with dwindling sales growth FMCG companies may find the bottomlines a little difficult to replicate in the coming year. The margins which emerged due to a fall in the raw material prices and decreased interest expenses, may remain stagnant or may even fall in the coming year.

So overall when interpreting results look for the causes of a rise in the fall of the topline and bottomline. A fall in the topline growth, unless it is seasonal, is more difficult to correct and to that extent is more likely to carry into the next quarters than a fall in the bottomline growth. This is because it is impacted by macro economic factors out of the control of the company or industry, whereas the fall in bottomline line growth is somewhat a result of micro and macro economic factors which to some extent can be controlled by the company or industry.

Aru Srivastava

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