India Inc. staring at 3rd consecutive quarter of profit margins squeeze: Crisil Research

India Inc. is staring at the third consecutive quarter of a year-on-year drop in profit margins for the April-June 2022 period, a Crisil Ratings arm said on Monday.

Operating profit margins have likely fallen by 2-3 percentage points for the June quarter compared with a year earlier, Crisil Research said after analysing 300 companies excluding those from the financial services and oil and gas sectors. It said almost half of the 47 sectors it tracks are likely to show a contraction in margins.

Corporate revenues are estimated to have logged healthy growth of 30% on-year in the first quarter, largely supported by price increases and moderately rising volumes, it said.

The rating agency’s estimates came ahead of earnings for the June quarter by a majority of companies, which are set to be announced amid adverse events such as the impact on commodities because of geopolitical tensions and depreciation in the Indian rupee to record lows.

Operating profit margins in construction-linked sectors were likely to have fallen the most, at more than 9.9%, followed by the investment-linked segment, which saw an on-year margin erosion of over 2.6%, the agency said.

Among construction-linked sectors, steel products saw a sharp margin contraction of about 15% as input cost escalation — both coking coal and iron ore prices have risen — was higher than the rise in steel prices, it said, adding that the petrochemicals sector saw a steep contraction in margins to the extent of 15%.

In contrast, the margins of consumer discretionary services and products, as well as consumer staples services, would report an expansion of up to 3 percentage points in the operating profit margin for the quarter, it said, attributing it to airlines services (which rebounded to a healthy level after the operating loss of last fiscal), followed by telecom services (due to tariff increases), and the media and entertainment segment.

Margins of consumer staple services were estimated to have been driven by a rise in profitability in the sugar sector, it said.

“The current fiscal could see Ebitda (Earnings before interest, taxes, depreciation and amortisation) margin contract further to reach 19-21% largely due to elevated energy and metal prices,” director Hetal Gandhi said.

Ms. Gandhi said the Ukraine-Russia conflict had sent crude and natural gas prices soaring, and posed uncertainty for trade in metals such as steel, which would lead to elevated prices of commodities and hence continued pressure on profitability.

Associate director Sehul Bhatt said construction-linked and consumer discretionary segments accounted for 54% of the incremental revenue in the first quarter.

For the quarter, automobile revenue is estimated to have risen a sharp 64-67% due to a lower base last fiscal, an estimated 22-27% increase in realisations and a 30-35% growth in volume.

Similarly, cement revenue is estimated to have climbed 20-22% for the June quarter, on a very low base of last fiscal, as the year-earlier quarter was hit by the second wave of COVID-19 pandemic. Volume was also expected to have risen on a low base, though on a sequential basis, both volume and revenue were estimated to have dwindled, it said.