Q3 Results Preview: India Inc.’s Ebitda Margin To Shrink First Time In 12 Quarters: Crisil
India Inc.’s operating margin is expected to contract in the third quarter amid rising input costs, according to Crisil Research.
Corporate profitability, as defined by the earnings before interest, taxes, depreciation and amortisation margin, likely dropped 100-120 basis points year-on-year and 70-100 basis points sequentially in the quarter ended December, Crisil’s analysis of 300 companies, excluding financial services, and oil and gas sectors, indicated.
This marks the first year-on-year decline in 12 quarters.
As many as 27 of the 40 sectors tracked by Crisil are likely to see their Ebitda margins shrink during the period.
Margins in consumer discretionary likely fell 130-150 basis points year-on-year, and in export-linked by 200-250 basis points.
Information technology services likely saw margins contract 230-250 basis points due to increased subcontracting, while steel products and pharmaceuticals may log a contraction of 110-130 basis points each due to rising input cost.
“Companies were unable to fully pass on soaring input cost, especially key metals and energy prices,” Hetal Gandhi, director at Crisil Research, said in the report. “Flat steel prices were 48% higher on-year in the third quarter, while aluminium was up 41%. The price of Brent crude surged nearly 79%, while spot gas and coking coal rocketed almost 5.4x and 2.4x, respectively, on-year.”
Crisil, however, expects corporate revenue to rise, driven by price hikes.
Revenue, it said, is estimated to have risen 16-17% over a year earlier to Rs 9.1 lakh crore in the third quarter. Sequentially, revenue is likely to have risen 3-4%.
Of the 40 sectors, revenue of 24 is estimated to have grown more than 20% on an annual basis.
Revenue from export-linked sectors such as IT services likely spurted 18-20%, aided by rising share of digital transformation as well as possible revival of deferred projects.
Revenue for pharma companies is seen growing at 6%, while for readymade garments and cotton yarn makers, it’s seen up 30-35% amid higher exports.
“In absolute terms, revenues of most sectors have now risen above their pre-pandemic levels, barring airlines and hospitality,” Drishti Chugh, senior research analyst at Crisil Research, was quoted as saying in the report. “But sectors linked to consumer discretionary products have been a drag on overall corporate revenue, which likely grew 7-9% on-year due to lower volume growth.”
Though revenue growth is in line with expectations, the underlying reasons have changed over the past three quarters, according to Crisil. While volume growth continued to underperform, price hikes provided some offset.
In automobiles, sales volume of commercial vehicles is expected to grow 8% on-year, while for cars and two-wheelers it may drop 9% and 20%, respectively. Realisations, however, could be higher—at 12% in passenger cars and utility vehicles, 7% for two-wheelers and 9% for commercial vehicles—due to price hikes and favourable product mix, Crisil said. “That would take the overall auto segment revenue growth to 4% on-year.”
Lower-than-expected auto production amid semiconductor shortage would also reflect in steel sales volume, which may slip 7% on-year.
In the consumer business segment, leading FMCG firms effected price hikes of 6-8% in the first half of this fiscal, and prices likely remained high even in the reported quarter.