*****Party is over – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/higher-input-and-finance-costs-will-impact-corporate-profitability-in-the-coming-quarters/article65401595.ece

The environment for corporates will get increasingly challenging in the coming quarters

The environment for corporates will get increasingly challenging in the coming quarters | Photo Credit: Nisha Dutta

Higher input and finance costs will impact corporate profitability in the coming quarters  

The earnings card of  India Inc for the fourth quarter of FY22 appears heartening at the aggregate level, but the ongoing geopolitical tension and global slowdown are beginning to show up in the profitability of companies in many sectors. Companies belonging to the Nifty 500 basket, excluding financial companies, which have declared results for the fourth quarter, have reported a robust 25 per cent growth in revenue in the aggregate, compared to the corresponding period in the previous year and their net profit has grown 17 per cent. But this growth has largely been led by select commodity companies which have seen their realisations improve sharply in the March 2022 quarter due to the jump in global commodity prices caused by the supply disruptions due to the war. The spike in crude oil prices resulted in a large increase in profits of oil marketing companies. Similarly metals, chemicals and fertiliser manufacturers witnessed a big growth in revenue as well as profits which helped the aggregate numbers of the Nifty 500 group of companies.   

However, companies with commodities as raw materials suffered a dent in margins as their input costs went up. Similarly, increase in crude oil prices has increased transportation costs for all companies. Overall gross margins for Nifty 500 companies, excluding financials, declined from 70 per cent in the first quarter of FY22 to 65 per cent in the fourth quarter. Manufacturers of chemicals, FMCG, cement and capital goods witnessed an average gross margin erosion of 400 basis points. Global commodity prices are rising not just because of the ongoing war but also due to increased consumption as the pandemic abates. With global supply chain bottle-necks continuing, input cost pressure on margins will persist. The environment is going to get increasingly challenging in the coming quarters with companies having to face lower demand and higher expenditures. With the RBI beginning its rate-hike cycle, consumption demand is likely to be impacted, thus reducing the pricing power of these companies. Recent deleveraging by large manufacturing companies insulates them, to some extent, from higher interest rates but companies may postpone their fresh capex plans in an interest-rate up-cycle. IT companies do not face the risk of increased input costs, but they are witnessing an increase in wage bills due to higher employee churn. This has resulted in an erosion of operating margins of all IT companies in the fourth quarter.  

The environment is going to get more challenging in FY23 with both revenue and profit growth coming under pressure. While larger companies have the resources to withstand such difficult periods, medium and smaller sized companies may face greater stress. It is important for investors to moderate their near-term expectations from equity investments. The strong returns in equities from the pandemic lows has led to expectations – especially among the new investors – that double-digit returns can be earned every year. Investors need to be conscious of business cycles and the need to continue investing in a disciplined manner through these cycles.  

Published on May 10, 2022


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