Even as company results for the quarter ended March are pouring in, the analyst community has started working out the likely projections for the current financial year.The initial projections, at least, suggest that things are not looking good enough for India Inc, as margins are expected to soften further.
According to a recent report by Crisil Research, rising input costs will cause profitability to decline in 2011-12.
This will be led by decline in operating margins. The average Ebitda (earnings before interest, taxes, deprciation and amortisation) margins of 17 sectors (excluding oil & gas and banking) covered by Crisil Research are expected to fall by around one percentage point (100 basis points).
Sectors such as cement, real estate, textiles and shipping will see a sharper drop in profitability.
For instance, led by overcapacity concern, the cement sector could see seven per cent decline in operating margins in 2011-12.
The real estate sector, which has seen a sharp run-up in prices, is likely to see a correction and is thus expected to witness a six per cent drop in operating margins.
Sugar and textiles are the other major sectors which could see pressure.
In textiles, the inability to fully pass on the increase in input costs is expected to affect industry profitability.
"Given the limited pricing flexibility in most sectors, growth will be accompanied by margin pressure, as companies will be forced to absorb a part of the rising costs.
Accordingly, the Ebitda margins are likely to decline to 19 per cent in 2011-12 from 20 per cent in 2010-11," says Prasad Koparkar, head - industry & customised research, Crisil Research.
However,
upstream oil companies and integrated metals players, having access to captive natural resources, are expected to beat this trend.
Buoyant global prices backed by robust demand will allow an improvement in their margins, says the report. Aluminium, oil and gas exploration and the steel sector will witness an expansion in operating margins from one to four per cent.
Crisil mentioned that inflation had soared to nine per cent in 2010-11, following an unprecedented increase in domestic food and commodity prices, while global crude prices had peaked at $122 a barrel.
The Reserve Bank's efforts at taming inflation had pushed up lending rates by around 200 bps. These developments had a negative impact on costs and profitability.
Crisil Research analysed 20 sectors, which constitute over 90 per cent of the BSE Sensex and BSE 500 companies, to assess and forecast how each of these would perform in 2011-12.
According to the study, the weighted average revenue growth of companies will be maintained at a healthy 18 per cent. Growth would be led by sectors such as textiles, retail, fertilisers, commodities and automobiles, where growth is expected to be value-driven, as the rising cost of raw materials are likely to be passed on to end-consumers through higher prices.
Export-oriented sectors such as information technology and pharmaceuticals will see healthy demand growth, driven by increasing penetration and recovery in global demand.
In oil and gas exploration, shipping and real estate, a slowing in volume growth will pull down revenue growth.
On the other hand, interest rate-sensitive sectors such as automobiles and real estate will see a sharp deceleration in revenues, after a strong performance in 2010-11.
