'India Inc staring at 3rd consecutive qtr of profit margins squeeze in Q1'

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 as compared to the year-ago period, Crisil Research said after analysing 300 companies excluding those from 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 a healthy growth of 30 per cent on-year in the first quarter, largely supported by price hikes and moderately rising volumes, it said.

The rating agency estimates come ahead of earnings for the June quarter by a majority of companies, which come amid adverse events like the impact on commodities because of the geopolitical tensions and depreciation in the Indian rupee to record lows.

Operating profit margins in construction-linked sectors are likely to have fallen the most, at over 9.90 per cent, followed by the investment-linked segment, which saw an on-year margin erosion of over 2.60 per cent, the agency said.

Among construction-linked sectors, steel products saw a sharp margin contraction of around 15 per cent on-year 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 per cent.

In contrast, the margins of consumer discretionary services and products, as well as consumer staples services, will 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 hikes), and the media and entertainment segment.

Margins of consumer staple services are 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 per cent largely due to elevated energy and metal prices," its director Hetal Gandhi said.

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

Its associate director Sehul Bhatt said construction-linked and consumer discretionary segments account for 54 per cent of the incremental revenue in the first quarter.

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

Similarly, cement revenue is estimated to have grown 20-22 per cent year-on-year for the June quarter, on a very low base of last fiscal, as the year-ago quarter was hit by the second wave of Covid pandemic. Volume is also expected to have risen on a low base, though on a sequential basis, both volume and revenue are estimated to have dwindled, it said.