Sectors that felt margin squeeze in Q1 and those that grew the fastest

India Inc’s profitability likely remained steady in the first quarter of the current financial year on a sequential basis but worsened by 200-300 basis points (bps) compared with the level a year ago, as companies were unable to pass on the entire cost pressure to the customers.

An analysis of more than 300 companies showed the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of almost half of the 47 sectors contracted on-year during the quarter ended June 30.

The analysis, by credit rating and research firm Crisil, excluded banks and financial companies as well as oil and gas companies as it skews the overall picture given their large size.

The analysis shows the April-June period is the third consecutive quarter of on-year decline in EBITDA margins.

In fact, absolute EBITDA also shrank for the first time in five quarters as companies were unable to fully pass on the increase in input costs, especially of key metals and energy.

Crisil expects the current fiscal year could see EBITDA margin contract further, to 19-21%, largely due to elevated energy and metal prices. The Ukraine-Russia conflict has sent crude and natural gas prices soaring, and poses uncertainty for trade in metals such as steel, which will lead to elevated prices of commodities and put more pressure on profitability.

Even though corporate results have just started to be announced for the quarter ended June 30, the EBITDA margin in construction-linked sectors is likely to have fallen the most, by more than 990 bps on-year. This is followed by the investment-linked segment, which saw an on-year margin erosion of over 260 bps, as per Crisil.

Within construction-linked sectors, steel products saw a sharp margin contraction of around 1,500 bps due to input cost escalation — both coking coal and iron ore prices have risen — being much higher than the rise in steel prices.

Prices of flat steel were on average up to 10% higher year-on-year in the first quarter, while those of aluminium were up around 30%. The price of crude (Indian basket) surged nearly 50-60%, while those of spot gas and coking coal more than tripled and quadrupled, respectively, compared with the year-ago period. The petrochemicals sector, too, saw a steep contraction in margins, to the tune of 1,500 bps year-on-year.

In contrast, the margins of consumer discretionary services and products, as well as consumer staples services, saw an expansion of 200-300 bps on-year.

Margin expansion in consumer discretionary services was largely driven by airlines services (which rebounded to a healthy level after the operating loss of last fiscal), followed by telecom services (due to tariff hikes), and the media and entertainment segment.

Margins of consumer staples services are estimated to have been driven by a rise in profitability in the sugar sector.

Revenue picture

Corporate revenue is estimated to have logged a healthy growth of around 30% on-year in the first quarter, largely supported by price hikes and moderately rising volumes. Volume gains were largely attributed to a pick-up in economic activity. On a sequential basis, though, corporate revenue likely fell 3-5% on-quarter.

Just over half of the growth in total year-on-year incremental revenue in the first quarter of the current fiscal year was attributed to just two segments: construction-linked and consumer discretionary products.

For the quarter, automobile revenue is estimated to have risen sharply by 64-67% on-year due to a lower base of last fiscal, an estimated 22-27% increase in realisations, and a 30-35% increase in volume.

Cement revenue is estimated to have grown 20-22% on-year, on a very low base of last fiscal, as the year-ago quarter was hit by the second wave of the Covid-19 pandemic. Volume is also expected to have risen on a low base, though on a sequential basis, both volume and revenue are estimated to have declined.

At the same time, metals such as steel and aluminium are estimated to have witnessed strong double-digit revenue growth, mostly driven by price hikes to pass on the rise in raw material costs.

On the services side, revenue of IT services firms is estimated to have increased around 18% on-year, aided by continued demand for digital services and cloud services.

In absolute terms, of the 47 sectors analysed in the first quarter of this fiscal year, more than 90% are estimated to have seen revenue exceed the pre-pandemic level. Overall, aggregate revenue recovered up to 146%, while revenue of key sectors linked to construction and investment recovered to the extent of 150-200% and more.

Agri-linked sectors, too, have fully recovered and reached more than 120%.

On the other hand, sectors such as roads and highways, gems and jewellery exports, and distilleries and breweries failed to recover fully or barely recovered during the quarter, according to Crisil.

In the current fiscal year, overall revenue is expected to grow 10-14% on-year following continued recovery in volume and higher realisations. Consumer discretionary segments such as airline services and hotels will steer performance amid strong demand recovery, Crisil said.