Cement, realty, textiles may see profitability drop this year

Cement, real estate, sugar and textiles sectors could see profitability drop sharply this fiscal even as the impact of rising raw material costs is felt across the board, say analysts.
According to a Crisil Research report on corporate earnings for fiscal 2011-12, rising input costs would cause the operating margins of companies in 17 out of 20 services and manufacturing sectors surveyed to decline by almost 100 basis points (bps) to 19% during the fiscal.
Companies in cement, real estate, sugar and textiles sectors would see the maximum decline in profitability with aggregate sector operating margins likely to decline by 700 bps, 600 bps, 350 bps and 250 bps, respectively, the report said.
“We expect the cement sector to be affected the most due to overcapacity, putting pressure on realisations even as higher coal prices and transportation costs will impact the inputs side. Similarly, textile sector would be affected by inability of manufacturers to pass on higher raw material costs, thereby putting pressure on margins,” said Prasad Koparkar , head - industry and customised research at Crisil Research.
Cotton prices have risen from `80-90/kg to `150/kg in the last one year, whereas the garment prices have not increased in similar proportion.
In the shipping sector, which is linked to global economic activity, operating margins would be impacted by lower freight rates, while the real estate sector would bear the brunt of lower off-take, say experts.
Some, however, believe the impact could be lesser in the cement sector given cartelisation among the players to maintain pricing discipline.
“Though the demand-supply is skewed towards excess supply, the cement producers are currently able to maintain the prices by running their plants at sub-optimal levels of 75-80%. We may see demand coming in line with supplies after 2-3 quarters somewhere in first quarter of fiscal 2013 as government spending picks up,” said Manish Sonthalia, senior vice-president at Motilal Oswal Securities.
Sectors likely to escape contraction in margins include upstream oil companies and integrated metals players having access to captive natural resources —- buoyant global prices backed by robust demand will allow an improvement in their margins.
But the expected drop in profitability notwithstanding, experts don’t see any problem in topline growth.

“Revenue growth is expected to average 18% for the sectors in our set. Growth would be led by sectors such as textiles, retail, fertilisers, commodities and auto, where it is expected to be value-driven as rising cost of raw materials is likely to be passed on to end consumers through higher prices. Even export-oriented sectors such as IT and pharmaceuticals will see healthy demand growth driven by increasing penetration and recovery in global demand,” said Koparkar.
Experts see rising raw material prices and higher inflation to continuing over the next two quarters or so, thereby driving down the corporate earnings this fiscal.
“Margin pressures are seen across the board. With cost pressures on the rise and demand still reasonably firm, we expect core inflation (non-food manufactured WPI) accelerating from 7.1% year on year in March to around 8% by September. This will lift headline WPI inflation from 8.9% year on year in Q1 2011 to 9.1% in Q2 and to a peak of 9.6% in Q3 due to the lagged pass-through of higher prices,” said Sonal Verma, economist at Nomura Financial Advisory & Securities.
“The high interest rates and input cost pressures would lead to more downgrades in the first half of this fiscal, after which the monsoon and fall in global commodity prices may help ease off the pressures. Overall, we expect a slight downward revision in Sensex earnings in FY12,” said Sonthalia.