Crisil has said in a report that due to the decrease in commodity prices and softening in revenue growth, India Inc. in the December quarter. Its operating margin is likely to decline by 270 basis points (bps) to 18-19 per cent.
However, sequentially, operating margin is set to rise for the first time in six quarters, the ratings agency said on Tuesday.
Revenue will grow 14% year-on-year to ₹10.9 lakh crore on cheaper goods and weak global demand, driven by continued volume growth in consumer discretionary segments and some price increases.
On a sequential basis, revenue growth has been muted at 0.9%, but the quarter has seen profitability up 140 bps.
Operating margin is likely to decline by 270 bps year-on-year, slower than the previous two quarters, as easing commodity prices provide relief amid subdued revenue growth.
This is the fifth quarter of on-ear contraction. Crisil said on a sequential basis, operating margin would have improved to 18-19% in the third quarter from 17.2% in the previous quarter for the first time in six quarters.
The number has been falling since touching 23.7% in the first quarter of the last fiscal, the agency said, based on an analysis of more than 300 companies, excluding the financial services and oil and gas sectors.
In the nine months to December, revenue has seen a 24% year-on-year growth, while margins have contracted by 400 bps.
Hetal Gandhi, director of research at CRISIL Market Intelligence & Analytics, said 20 of the 47 sectors tracked are expected to outpace overall revenue growth in the third quarter, while three-quarters should see operating margins contract.
Revenue growth in the third quarter will be driven by consumer discretionary items such as airlines and automobiles, while construction-related items such as steel, aluminum and certain industrial items such as petrochemicals will underperform.
Slowdown in the US and Europe – the two biggest overseas markets for India Inc – will curtail BPO services and lead to contraction in exports of gems and jewelery and textiles as consumers cut spending.
While revenue for airlines should rise by 41% after a significant increase in passenger traffic and fares for automobiles, this should be offset by 22% on higher domestic volumes and receipts.
IT services is broadly in line with the overall revenue trend, growing 13% year-on-year.
The revenue of construction-related companies is seen at the fifth spot on a healthy increase in capex allocation by the Center and states for infrastructure creation, healthy growth in order books and better execution.
According to Sehul Bhatt, an associate director at the agency, operating margins in the automobile, metals and construction sub-sectors, which contracted in the second quarter, reversed the sequential trend in the third quarter. Of the 20 areas driven by revenue growth, 10 may see margin contraction and five may see marginal improvement.
Operating margins of steel companies are likely to contract by over 800 bps annually due to 15-20% on-year improvement in flat steel realizations and costlier iron ore and coking coal. The construction-related sectors and industrial goods will see a margin contraction of 500 bps due to increased input costs and inability to pass the same on to customers.
Margins for cement makers are seeing a contraction of 230 basis points, again due to higher input costs.