CRISIL Expects EBITDA Margin of Indian Companies

Even as the third quarter results season has just about got underway, rating agency CRISIL has estimated that 27 out of the 40 sectors under analysis in India could see shrinkage of operating or EBITDA margins in the third quarter. The extent of this margin contraction could vary across sectors.

According to the CRISIL report, Indian corporates are likely to report a contraction in margins on a YoY basis and also on a sequential basis. This fall in margins will happen for the first time in the last 12 quarters and the villain of the piece is the sharp spike in input costs of commodities seen in the last few months.

According to the 300 companies that were analysed by CRISIL, it is estimated that the fall in OPMs on a YoY basis would be in the range of 100 bps to 120 bps. In addition, the OPMs are also expected to fall by 70 bps to 100 bps on a sequential basis. These are regular industrial sectors but exclude the financial services as well as the oil & gas sectors in India.

One of the main reasons for the fall in OPM in the latest quarter is steeply higher input costs. Broadly, metals, minerals and oil saw a spike in price. For example, flat steel is higher 48% on a YoY basis, aluminium is up 41% YoY while crude oil is up by a whopping 79% on a YoY basis.

We are not even talking about natural gas which is up 5 times and coal which is up nearly two-and-half times in this period. However, the top line revenues are expected to grow at around 16% in the third quarter on a YoY basis.

In fact, barring hospitality and airlines, all the other segments are expected to have seen a spike in revenues. While some of this is due to price increases, the fall in operating margins is due to the inability of the company to pass on the entire cost spike to the end customer. That has dented margins. In terms of sectoral OPMs, aluminium and telecom services are expected to report better operating margins than last year third quarter as per CRISIL.

While Aluminium will gain from robust prices, telecom is likely to gain from better realizations from upgraded customers. On the losing side, consumer discretionary is likely to see up to 150 bps cut in operating margins due to limited ability to pass on cost hikes in a competitive scenario.

Even automobiles are expected to have reported fall in margins despite price hikes across the board. Interestingly, the biggest contraction in operating margins of 225 basis is expected in IT sector due to higher travel and sub-contracting costs.