Corporate profitability expected to fall 200-300 basis points in first quarter: report

Corporate profitability – or earnings before interest, tax, depreciation, and amortization (EBITDA) margin – likely held steady in the first quarter sequentially, but fell 200 to 300 basis points (bps), CRISIL analysis of more than 300 Indian companies, excluding those in the financial services and oil and gas sectors, says.

This would mark the third consecutive quarter of year-on-year declines. EBITDA margins in nearly half of the 47 industries tracked by CRISIL Research are estimated to have contracted during the quarter. Absolute EBITDA profit also fell for the first time in five quarters as companies were unable to fully pass on higher input costs, particularly key metals and energy, according to the rating agency.

Hetal Gandhi, Director of CRISIL Research, said: “The current financial year could see the Ebitda margin contract further, to 19-21%, largely due to high energy and metal prices. The Ukraine-Russia conflict has driven up crude and natural gas prices and poses uncertainty for trading metals such as steel, which will lead to higher commodity prices and therefore continued pressure on profitability. ”

According to CRSIL, during the first quarter, the EBITDA margin in the construction-related sectors is likely to have declined the most, at more than 990 basis points, followed by the investment-related segment, which experienced a margin erosion over the year of more than 260 basis points.

Among construction-related sectors, steel products saw a sharp contraction in margins of around 1,500 basis points, with rising input costs – coking coal and iron ore prices rising – outpacing to rising steel prices. Flat steel prices rose on average up to 10% year-on-year in the first quarter, and aluminum prices by around 30%.

The price of crude (Indian basket) jumped nearly 50-60%, while those of spot gas and coking coal soared nearly 2.3 times and 3.3 times, respectively, year-on-year. Even the petrochemical sector experienced a sharp contraction in its margins, in the order of 1,500 basis points.

In contrast, CRISIL reports that margins in consumer discretionary services and products, as well as consumer staples, expanded by 200 to 300 basis points. Margin expansion in consumer discretionary services was primarily driven by air services, which rebounded to a healthy level from last year’s operating loss, followed by telecommunications services due to rate increases and the segment media and entertainment.

Margins in consumer staples are believed to have been driven by increased profitability in the sugar sector.

For its part, according to the rating agency, corporate revenues are expected to have recorded healthy growth of around 30% year-on-year in the first quarter, mainly supported by price increases and moderately rising volumes. The volume gains were largely attributed to a pick-up in economic activity. On a sequential basis, however, business revenue was likely down 3-5% from the prior quarter.

Sehul Bhatt, Associate Director of CRISIL Research, said: “Of the total incremental year-on-year revenue in the first quarter of the current fiscal year, nearly 54% was contributed by just two segments, construction-related products and Consumer Discretionary The majority of This increase was driven by the Steel and Cement sectors. consumer discretionary services accounted for approximately 60%, largely supported by airline services, media and entertainment.

For the quarter, automotive revenue is expected to have increased 64% to 67% due to a lower last year base, an estimated 22% to 27% increase in completions and an increase of 30 % to 35% volume.

Cement revenues are estimated to have increased 20-22%, off a very low base from last year, as the second wave of the pandemic hit the prior year quarter. Volume is also expected to have increased on a weak basis, although on a sequential basis the rating agency says volume and revenue are expected to have declined.

According to the report, metals sectors such as steel and aluminum are estimated to have experienced strong double-digit revenue growth, mainly driven by price increases to pass on rising raw material costs. On the services side, IT service provider revenue is estimated to have increased by around 18%, helped by continued demand for digital and cloud services.

Jignesh Surti, Director of CRISIL Research, says: “In absolute terms, of the 47 sectors analyzed in the first quarter of this fiscal year, it is estimated that more than 90% saw their revenues exceed the pre-pandemic level or the first quarter. of fiscal year 2019. Overall, aggregate revenue recovered by up to 146%, while revenue from key sectors related to construction and investment recovered by 150-200% or more. Sectors related to agriculture also fully recovered and reached more than 120%. On the other hand, sectors such as roads and highways, gem and jewelry exports, and distilleries and breweries did not fully or barely recover during the quarter. »

In the current fiscal year, revenue is expected to increase by 10% to 14% following the continued recovery in volume and rising realizations. Consumer discretionary segments, such as airlines and hotels, will lead performance amid a strong recovery in demand, the rating agency added.

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