Corporate profitability, or the average Ebitda (earnings before interest, taxes, depreciation and amortisation) margin, likely declined 200-300 basis points (bps) on-year and 40-60 bps sequentially in the fourth quarter (Q4) of fiscal 2022, CRISIL's analysis of over 300 companies (excluding those in the financial services, and oil and gas sectors) indicates.
This marks the second on-year decline in 12 quarters. Ebitda margins of as many as 32 of the 47 sectors tracked by CRISIL Research are estimated to have contracted during the fourth quarter, on-year.
Says Hetal Gandhi, Director, CRISIL Research, "For the fiscal, overall, Ebitda margin likely shrank 20-40 bps on-year to 21-23%. Companies were unable to fully pass on soaring input cost, especially prices of key metals and energy. In the current fiscal, Ebitda margin could contract another ~100 bps on-year to 20-22%, largely due to elevated energy and metal prices. The Ukraine-Russia conflict has sent crude and natural gas prices soaring. Further, trade across metals such as steel may experience uncertainty amid the crisis, which will lead to elevated prices of commodities and hence continued pressure on profitability."
In Q4, margins in construction-linked sectors are likely to have fallen the most at 500-600 bps on-year, followed by exports-linked and industrial commodities sectors, where margins eroded ~400 bps on-year. Within the construction-linked sectors, steel products saw a sharp margin contraction of over 900 bps on-year as input cost escalation (both coking coal and iron ore prices have risen) was higher than the rise in steel prices. Prices of flat steel were on average ~25% higher on-year in the fourth quarter, and of aluminium by 53%. The price of Brent crude surged nearly 31%, while those of spot gas and coking coal rocketed almost 1.3x and 2.8x, respectively, on-year.
In contrast, the margins of consumer discretionary services and consumer staples services and investment-linked segments expanded, albeit moderately. Margin expansion in consumer discretionary services was largely supported by telecom services, which is estimated to see on-year improvement of over 250 bps following tariff hikes, whereas margins of consumer staples services are estimated to have been driven by a rise in profitability in the hospital sector.
On its part, corporate revenue is estimated to have grown 16-18% on-year in the fourth quarter, largely supported by price hikes. Revenue grew across sectors, led by moderate rise in volume and firm commodity prices. Volume gains were largely attributed to pick-up in economic activity. On a sequential basis, corporate revenue is estimated to have grown by ~5% on-quarter.
Says Sehul Bhatt, Associate Director, CRISIL Research, "In absolute terms, revenue of most sectors and segments rose above their pre-pandemic levels last fiscal. Revenue of sectors linked to construction, consumer staple services, and agriculture recovered the fastest to 1.33 times of pre-pandemic revenue. In contrast, consumer discretionary products and industrial commodities witnessed a relatively slower recovery of 1.1 times."
For the quarter, automobiles revenue is estimated to have risen by a moderate 0-5% on-year, as a 12-17% fall in volumes partially offset the impact of an 18-23% increase in realisations (along with premiumisation). Supply chain and weak rural demand led to volume uncertainty. Cement sector revenue also remained a drag with meagre growth, as dwindling volumes upset the impact of higher realisations. On the other hand, sectors like IT services, up 20-22% on-year, also propelled overall revenue growth, aided by continued demand for digital services and cloud. Revenue of the steel sector is estimated to have grown 30-35% on-year on the back of an increase in average realisations, while that of aluminium jumped 50-55% on-year on a ramp-up in production.
For the fiscal, overall revenue is expected to have grown a healthy ~26% on-year.
Fiscal 2022 also saw value growth in revenue outpacing volume growth, on the back of partially passing on of rise in input costs for majority of the companies. Sectors such as automobile, steel, and aluminium witnessed the highest rise in value compared with volume growth. Some sectors opted for calibrated price hikes to prevent a potential drop in volumes.
Says Jignesh Surti, Manager, CRISIL Research, "Of the total on-year incremental revenue in fiscal 2022, nearly 45% was contributed by just three sectors. About 23% was contributed by steel products, ~13% by IT services, and ~9% by automobiles. Of the total on-year incremental absolute Ebitda profits in fiscal 2022, the steel sector accounted for nearly 36%, while aluminium and telecom services accounted for around 12% and 9% respectively."
In the current fiscal, revenue is expected to grow 10-14% on-year following continued recovery in volume and higher realisations. Consumer discretionary segments (such as airline services and hotels) will steer performance amidst strong demand recovery.