The operating profit margin of Indian companies expanded by 180 basis points (bps) on average sequentially to 16.3% during the December quarter (Q3 FY23), despite subdued sequential revenue growth of 1.4%, according to an analysis by rating agency ICRA Ltd. Margin pressures are likely to ease in the coming quarters given softening of commodity prices, but uncertainties remain, Icra said in a report.
Despite the fact that it was a seasonally strong quarter due to the holiday season, sequential revenue growth was relatively muted due to inflationary headwinds weighing on consumer sentiments and an uneven sectoral trend. Sectors such as airlines, hotels, gems & jewelry, capital goods, and fertilizers reported revenue growth on a sequential basis due to successive price hikes and strong demand supported by festive period sales,“ Icra said.
Icra’s analysis of the Q3 performance of 620 listed companies, excluding financial sector entities, revealed expectedly positive revenue trends, with a year-on-year (YoY) growth of 17.2%, despite subdued sequential revenue growth of 1.4%. Almost all sectors reported revenue growth in year-on-year (YoY) terms in Q3, with hotels, oil and gas, auto, airlines, and power leading the way, which is likely to bolster the GDP growth in that quarter.
Sruthi Thomas, assistant vice-president & sector head at Icra, said, “The YoY growth in revenues during Q3 FY2023 was primarily driven by increased realization levels on account of input cost inflation, along with moderate volume growth aided by a revival in demand across sectors. Icra’s analysis shows that the operating profit margins (OPM) of India Inc contracted by 237 bps on a YoY basis in Q3 FY2023 due to inflation in input costs arising from an increase in commodity prices, as well as a spike in energy costs, which could not be entirely passed on to the customers.“
Thomas added that the operating profit margin, however, expanded 180 bps sequentially to 16.3% during the quarter, aided by a softening in the prices of many commodities and general price hikes undertaken by entities. Sequential margin expansion was most visible in sectors such as aviation, hotels, cement, and power.
“While margin pressures are likely to ease further in the coming quarters given further softening of commodity prices, uncertainties remain due to the evolving geo-political situation. Hence, despite some softening and stabilization of commodity prices over recent months, India Inc’s ability to improve earnings will be dependent on headwinds such as energy cost inflation, evolving recessionary trends in the developed markets, and the impact of fluctuations in foreign exchange on both imports as well as export-oriented sectors,“ Thomas said.
The interest coverage ratio of Icra’s sample, adjusted for sectors with relatively low debt levels (IT, FMCG, and pharma), witnessed a YoY moderation in Q3 FY2023 to 4.3 times from 5.1 times, mainly on account of a) lower earnings in select sectors as compared to historic trend and b) higher interest rates on the back of rate hikes by the Monetary Policy Committee (MPC).
“Icra expects credit metrics to show further sequential improvement going forward, given the recent trends in softening of commodity prices, general price hikes taken by companies, and reduction in energy cost. However, the impact of the ongoing geo-political developments and the possible recessionary situation in parts of the global economy, as well as further monetary policy tightening on the macroeconomic environment remains to be seen,“ Thomas added