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Input cost inflation continues to push up corporate revenues but disrupts margins: ICRA


·       While Corporate India reported positive revenue growth trends during Q1 FY2023, earnings pressure continued due to commodity and energy cost inflation, and supply chain disruptions

·       ICRA’s sample of 620 listed companies (excluding financial sector entities) reported 39% YoY growth in revenues during Q1 FY2023, while OPM contracted by 213 bps

·       Margin recovery is expected from H2 FY2023, although contingent on resolution of aforementioned challenges


A study of 620 listed companies by ICRA Research of Q1 FY2023 performance has expectedly shown positive trends in revenues, with Corporate India’s  aggregate revenues (excluding financial sector entities) growing by 39.1% on a YoY basis. This growth in revenues was optically aided by the low base of the previous year, which had been impacted by the second wave of the pandemic, as also the price hikes witnessed across several sectors. However, the sequential growth in revenues during the quarter was dismal at 1.5% and the trends varied across sectors. Companies were however, unable to realise the benefits of the revenue growth in its earnings performance, with the OPM contracting on both the YoY as well as the sequential basis during Q1 FY2023.


Commenting on the trends, Ms. Kinjal Shah, Vice President & Co-Group Head, ICRA, said“Demand revival post the pandemic led to the sharp rally in prices of most commodities especially metals to multi-year highs during FY2022, exerting pressure on India Inc.’s margins. Prices of other commodities have also moved up over the past four-five quarters, and continued to act as headwinds to margins in Q1 FY2023. Consequently, the operating profit margin (OPM) contracted by 213 bps to 17.7% during the quarter. While these have seen some softening over the recent months, they remain at elevated levels.  In addition, several sectors also faced rural demand softening, which impacted revenues and margins to an extent. Nevertheless, price hikes taken by several entities across sectors, coupled with the softening in input costs during Q2 FY2023, should provide some comfort to the OPM going forward.”


In terms of industry-wise performance, while sectors like hotels, power, retail and oil & gas, among others, reported significant QoQ growth in revenues in Q1 FY2023, a few other sectors like airlines, construction, capital goods and iron & steel witnessed sequential decline in revenues. ICRA notes that the sequential growth momentum was most pronounced in energy-oriented sectors such as oil and gas, power, and also hospitality sectors such as hotels, with both volume and realisation growth supporting revenues during the quarter. Sectors like FMCG, on the other hand, reported modest single-digit growth, primarily led by price hikes undertaken to offset the input cost inflation, while volume growth was subdued.


The interest coverage ratio of ICRA’s sample, adjusted for sectors with relatively low debt levels (IT, FMCG and pharma) witnessed a YoY improvement in Q1 FY2023 to 5.5 times, despite the moderation in OPM. The YoY improvement in credit metrics was on account of the a) expansion in absolute operating profits as the demand situation improved and b) reduction in interest costs, given the general deleveraging trends across most sectors.


Ms. Sruthi Thomas, Assistant Vice President & Sector Head, ICRA Ratings, added, “While the credit metrics remained at an adequate level in Q1 FY2023, marginal improvement is likely going forward given the recent trends in softening of commodity prices, reduction in energy cost and easing of supply chain constraints. However, the ongoing geo-political developments, as well as the changes in Monetary Policy, including firming up of interest rates, and their impact on the demand environment, remains to be seen.”

ICRA believes that the Q2 FY2023 performance of India Inc. would face similar constraints as supply chain issues are easing only gradually, while commodity-led headwinds continue, especially in the wake of the elevated crude oil prices, depreciation of the INR vis-à-vis US$ and the geo-political developments. Further, the progress of monsoon will be critical to support demand recovery in rural markets, which have been subdued. The combined impact of these multiple factors on the credit metrics of India Inc. remains to be seen. The weakening of overall performance would be especially visible in sectors which have limited ability to pass on the inflationary pressures through price hikes to end customers. Fear of global recession also remains an evolving risk for export-focused sectors such as IT, automotive and industrials. 

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