India Inc.’s profit margin narrows in December quarter on high inflation: ICRA

India Inc’s operating profit margin narrowed by a sharp 2.37% in the December quarter to 16.3% on an annual basis due to inflation and rising energy costs, domestic ratings agency ICRA said on Monday.

When viewed sequentially, the operating profit margin for the December quarter expanded by 1.8% over the preceding September quarter, ICRA Ratings said, attributing the same to the easing in input costs and also price hikes by many companies.

Going forward, while price increases and sequential input cost reductions can boost margins in the near term, geopolitical tensions, recessionary concerns, and forex volatility continue to pose risks, the agency said.

The revenue of companies, excluding those in the financial sector, grew 17.2%, which was as per expectations, the agency said, adding that hotels, oil and gas, auto, airlines, and power sectors led the way.

However, the revenue growth was a muted 1.4% from a sequential perspective due to inflationary headwinds weighing on consumer sentiment.

“India Inc’s ability to improve earnings will be dependent on headwinds such as energy cost inflation, evolving recessionary trends in the developed markets, and impact of fluctuations in foreign exchange on both imports as well as export-oriented sectors,” its sector head Sruthi Thomas said.

The interest coverage ratio for the agency’s sample adjusted for sectors with relatively low debt levels like IT, FMCG and pharma witnessed a moderation in the third quarter to 4.3 times from 5.1 times on a sequential basis. This was mainly on account of lower earnings in select sectors compared with historical trends amid higher interest rates, it said.

According to Ms. Thomas, credit metrics are likely to show further sequential improvement going forward, given the recent trends in softening of commodity prices, general price increases resorted to by companies, and reduction in energy costs.