The profitability of corporates is estimated to have fallen by 200-300 basis points (BPS) year-on-year and 40-60 BPS on a sequential basis in the fourth quarter, impacted by soaring input costs. This would be the second on-year decline in 12 quarters, according to a report by Crisil Research.
The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of as many as 32 of the 47 sectors tracked by the firm were estimated to have contracted in Q4, it said.
“For the fiscal, overall Ebitda margins are estimated to have shrunk by 20-40 BPS on-year to 21-23%. Companies were unable to fully pass on soaring input costs, especially prices of key metals and energy. In the current fiscal, Ebitda margin could contract by another 100 BPS on-year to 20-22%, largely due to elevated energy and metal prices,” Hetal Gandhi, director at Crisil Research said.
“The Ukraine-Russia conflict has sent crude and natural gas prices soaring. Further, trade across metals such as steel may experience uncertainty amid the crisis, which will lead to elevated prices of commodities and hence continued pressure on profitability,” he added.
In Q4, margins in construction-linked sectors were expected to have fallen the most at 500-600 BPS on-year, followed by exports-linked and industrial commodities sectors, where margins eroded by 400 BPS. Within the construction-linked sectors, steel products saw a sharp margin contraction of over 900 BPS as input cost escalation (both coking coal and iron ore prices have risen) was higher than the rise in steel prices.
Prices of flat steel were on average 25% higher in the fourth quarter, and that of aluminium by 53%. The price of Brent crude surged nearly 31%, while those of spot gas and coking coal rocketed almost 1.3 times and 2.8 times, respectively.
In contrast, the margins of consumer discretionary services and consumer staples services and investment-linked segments expanded, albeit moderately. Margin expansion in consumer discretionary services was largely supported by telecom services, which is estimated to see on-year improvement of over 250 BPS following tariff hikes, whereas margins of consumer staples services are estimated to have been driven by a rise in profitability in the hospital sector.
On its part, corporate revenue is estimated to have grown 16-18% in the fourth quarter, largely supported by price hikes. Revenue grew across sectors, led by moderate rise in volume and firm commodity prices. Volume gains were largely attributed to pick-up in economic activity. On a sequential basis, corporate revenue is estimated to have grown by about 5%.
“In absolute terms, revenue of most sectors and segments rose above their pre-pandemic levels last fiscal. Revenue of sectors linked to construction, consumer staple services, and agriculture recovered the fastest to 1.33 times of pre-pandemic revenue. In contrast, consumer discretionary products and industrial commodities witnessed a relatively slower recovery of 1.1 times,” Sehul Bhatt, Associate Director at Crisil Research.
For the quarter, automobiles revenue is estimated to have risen by a moderate 0-5% on-year, as a 12-17% fall in volumes partially offset the impact of an 18-23% rise in realisations. Supply chain and weak rural demand led to volume uncertainty.
On the other hand, sectors such as IT services, expected to be up 20-22% on-year, also propelled overall revenue growth, aided by continued demand for digital services and cloud. Revenue of the steel sector is estimated to have grown 30-35% on-year on the back of an increase in average realisations, while that of aluminium jumped 50-55% on-year on a ramp-up in production.
For the fiscal, overall revenue is expected to have grown at a healthy 26% on-year. Fiscal 2022 also saw value growth in revenue outpacing volume growth, on the back of partially passing on the rise in input costs for the majority of the companies.
