Operating margins seen swelling as input costs drop

Local companies are expected to see their operating margins turn around after falling continuously over several previous quarters, thanks mainly to a sharp fall in commodity prices.

Crisil Research, for one, sees earnings before interest, tax, depreciation and amortisation (Ebitda) margins increasing 20-40 basis points (bps) year on year this quarter to 18-18.5%.

“With commodity prices softening and weak rupee continuing to support realisations of export-oriented sectors over the next couple of quarters, Ebitda margins are expected to rebound after falling continuously on a year-on-year basis for the last nine quarters,” the independent research house said in its quarterly results preview.

Ajay Bodke, head - investment strategy & advisory, Prabhudas Lilladher also believes that the operating profit margins are likely to see some relief on account of lower commodity prices. But from a year-on-year perspective, a drop of around 17-18% in currency is likely to negate much of the benefits, he said.

Prices of industrial raw materials like iron ore, coal, steel and rubber have seen sharp declines over the last two quarters.

However, the rupee has depreciated from an average of 45.78 per dollar in September last year to an average  55.23 this quarter.

Lower commodity prices are likely to keep realisations low. This, along with low investment activity and fall in consumption demand, is likely to push revenue growth to a 10-quarter low.

Crisil  expects aggregate revenue growth to come in at 14-15% for 288 companies across 28 sectors, excluding banks and oil companies.

“There has been a slowdown in urban consumption demand with job creation an issue in cities. Though late monsoon have abated concerns related to Rabi crop, its positive impact on rural demand is yet to be seen,” said Bodke.
Consumer discretionary sectors like two-wheelers, retail jewellery and textiles have seen considerable slowdown in demand lately.

Operating margins seen swelling as input costs drop
Prasad Koparkar, senior director, Crisil Research, believes that an improvement in corporate profitability will be led by sectors such as IT services, pharmaceuticals, coal, airlines, tyres and sugar, which are expected to witness more than 150 basis points year-on-year expansion in Ebitda margins.

“Furthermore, for sectors like telecom and petrochemicals, the extent of margin decline year-on-year will be slower compared to the last few quarters due to easing cost pressures,” he added.

Experts believe that the net profit margins would continue to remain under pressure due to higher interest costs.
“There are no visible signs of turnaround in corporate earnings outlook as the cost of debt continues to remain high and working capital cycle elongated. The improvement in earnings will only be seen once interest rates come down,” said Bodke.

However, many experts believe there has been a change in corporate sentiment of late, due to which we may see better management commentary.

“Though the major parameters like revenue and profit may not show any major improvement from last quarter, the company management’s commentary on future outlook is likely to be better. Sentiments have changed a lot after recent action from government on the diesel price hike and foreign direct investment fronts, but it remains to be seen how they will go forward in implementing concrete reforms related to mining, land acquisition and so on. If some of these start happening or RBI cuts rates, we may see improvement in net profit margins from September quarter onwards,” said Dipen Shah, head of research (private client group) at Kotak Securities.