CRISIL warns of third consecutive quarter of margin squeeze

In the last 2 quarters, Indian companies witnessed pressure on the operating profit margins. The reasons were not far to seek. Rising input costs, supply chain constraints and higher manpower costs had hit the operating margins of most of the companies. In fact, companies in the paints, automobiles and consumer goods sectors were facing margin pressures for quite some time. Now, CRISIL has issued a stern warning that June 2022 quarter could be the third consecutive quarter with a sharp drop in operating profit margins for India Inc.

CRISIL has come to this conclusion after an analysis of nearly 300 companies across the corporate spectrum in India. The CRISIL estimate is that operating profit margins or OPM in the June 2022 Q1FY23 quarter may have compressed further by 200 to 300 basis points on a yoy basis. This is on top of the margin squeeze that Indian companies have already witnessed in the December 2021 quarter and the March 2022 quarter. CRISIL looked at a total of 300 companies from 47 sectors, excluding financial services and oil & gas sectors. 

However, the top line is still expected to be healthy in terms of growth. For instance, CRISIL estimates that top line revenues are expected to have logged a healthy growth of 30% in Q1FY23. This growth in top line is largely a function of price hikes across most industries and moderate boost from volumes. For instance, in the last few quarters, the top bracket companies from the auto space and the FMCG space have been in a position to boost their pricing which more than made up for the fall in volumes in most sectors during the period.

The quarterly results are coming out at a time when there are several headwinds like the global hawkishness, rising commodity inflation, supply chain constraints etc. As a result, most of the companies have felt the impact of such events and that is likely to show in numbers. Also, the rupee is at an all-time low and that is likely to hit import intensive industries. The margin impact is likely to be the highest in the construction linked sectors where the operating profit margins may have fallen by over 990 basis points yoy.

Despite the best efforts of the government to ameliorate the problems of the steel sector, the sector is likely to have seen operating margin contraction of about 15 percentage points. On the back of input cost escalation. Take the case of steel. While steel prices have been raised in tandem with the input costs, the overall spike in the price of coking coal and iron ore prices was much higher than the rise in steel prices. Even petrochemicals sector is likely to have seen a similar contraction of around 15 percentage points in the Q1FY23.

However, there are likely to be some beneficiaries too. For instance, the margins of consumer discretionary companies and consumer staples are likely to see margin expansion of 300 basis points. Sectors like sugar and telecom are also likely to see a spike in the operating margin performance with the telecom sector benefiting from a sharp improvement in the average revenue per user (ARPU). Sugar is likely to see a boost to its profitability from better price realization amidst a global shortage.

On an overall basis, the EBITDA (Earnings before interest, taxes, depreciation and amortisation) margin are likely to have contracted to a level of 19% to 21% on an average, largely due to the elevated prices of metals and energy. That would be the lowest level of OPMs in a long time. After all, the Ukraine-Russia conflict has sent crude and natural gas prices through the roof and they have strong externalities. On a positive note, the big revenue boosters in June quarter are expected to be automobiles and cement.