Q3: India Inc set to see 100-120 bps margin compression

Mumbai: The operating margin of India Inc is likely to drop in the December quarter with a 100-120 bps year-on-year decline, as 27/40 sectors are set to see crimped margins despite higher revenue, according to a report.

Surging commodity prices and price hikes may help companies report a healthy 16-17 per cent revenue growth to Rs 9.1 lakh crore during the quarter ending December, the Crisil report said on Tuesday.

Software major TCS will open the earnings season Wednesday.

For the first time in as many as 12 quarters, corporate profitability as defined by the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, is likely to drop by 100-120 bps year-on-year and 70-100 bps sequentially in the December quarter, as 27/40 sectors with 300 companies tracked, excluding financial services, and oil & gas sectors, are likely to see their operating margin shrinking, the report said.

According to the analysis, the margin fall will be led by software (230-250 bps fall due to increased sub-contracting and seasonal weakness), other export linked sectors to the tune of 200-250 bps, consumer discretionary by 130-150 bps and steel products and pharma may log a contraction of 110-130 bps each due to rising input cost.

As per the agency, the margin fall is due to the fact that companies could not fully pass on the soaring input cost to end consumers, especially key metals and energy prices.

It can be noted that flat steel prices jumped 48 per cent year-on-year in Q3, while aluminium rallied 41 per cent. Brent crude surged nearly 79 per cent, while those of spot gas and coking coal rocketed almost 5.4x and 2.4x, respectively, the report said, adding the margin compression is despite higher revenue, driven by price hikes rather than volume growth.

However, for the first nine months of this fiscal, Ebitda margin is seen up 80-100 bps year-on-year to 22-24 per cent, aided by the low base last year. Ebitda profit growth should moderate to 10-12 per cent year-on-year, compared to a scorching 47 per cent logged in the first half of the fiscal, bolstered by the low-base effect, the report noted.

The report also said that though revenue growth is in line with expectations, underlying reasons have changed over the past three quarters as volume growth continued to underperform, which was partly offset by price hikes.

In automobiles, commercial vehicles sales are likely to grow 8 per cent, while for cars and two-wheelers it may drop 9 per cent and 20 per cent, respectively.

But realisations could be higher -- 12 per cent for passenger cars and utility vehicles, 7 per cent for two-wheelers and 9 per cent for commercial vehicles -- due to price hikes and favourable product mix. This will drive the overall auto segment revenue growth to 4 per cent annualised.

Lower-than-expected auto production partly due to semi-conductor shortage will reflect in steel sales volume, which is likely to slip 7 per cent.