Third Quarter Review: High Costs Squeeze India Inc’s Profit Margins

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Revenue growth was impressive as companies were able to push through price increases even though volume growth was modest. Companies with strong brands have been winners. For example, despite an unfavorable base, Pidilite saw a strong 24% year-over-year increase in revenue in Q3FY22.

High input costs squeezed margins across most of India Inc in the three months to December 2021. Operating profit margins for a sample of 432 firms (excluding banks and financials) contracted by 200 points year-over-year as raw material costs jumped 466 basis points year-on-year. However, with aggregate revenues up sharply – 32% YoY for the sample – operating profits increased 20% YoY and net profits increased 24% YoY. RIL and TCS represent just under a third of the sample’s revenues; excluding the two, revenue grew only 27% while profits grew 21% year-on-year.

The recovery is somewhat uneven; Even though the IT services companies continue to post good results, activity is sluggish in Bhel, where order intake is low due to delays in calls for tenders. At Larsen & Toubro, order intake during Q3FY22 was slightly below estimates.

Revenue growth was impressive as companies were able to push through price increases even though volume growth was modest. Companies with strong brands have been winners. For example, despite an unfavorable base, Pidilite saw a strong 24% year-over-year increase in revenue in Q3FY22.

However, high product prices appear to be limiting demand in some categories. Several directions point out that the recovery in rural areas, after the second wave, has been rather moderate. Two-wheeler data suggests high ownership costs may have kept buyers away. Volumes for motorcycles fell 20% at Bajaj Auto, partly because of the shortage of chips but also because there were fewer buyers. At Ceat, volumes were down 4.5% year-on-year while at Maruti Suzuki, they were down 13.2% year-on-year. UltraTech volumes were down 6% year-on-year in the quarter, primarily impacted by heavy and unseasonable rains in some locations, construction bans in some regions and labor shortages. Hindustan Unilever volumes were up just 2% year-on-year.

Nonetheless, price increases helped the major consumer packaged goods company post reasonably strong revenue growth of 10% year-over-year. Asian Paints was able to raise prices by around 22% in the nine months to December to combat a 25% increase in input costs. Cement maker UltraTech’s blended achievements were up 12% year-on-year as it was able to sell more high-end products. The average net selling price at Maruti increased by 15% year-on-year.

High costs have eaten away at margins; in Bhel, gross margins fell 100 basis points year-on-year, impacted by higher commodity prices on nearly 50% of the fixed-price order backlog. Marico’s consolidated gross margins fell 320 basis points. JSW Steel’s Ebitda margin contracted nearly 500 basis points year-on-year, although net sales increased 50% year-on-year. Bajaj Auto’s Ebitda margin, for example, contracted by 420 basis points year-on-year, causing Ebitda to fall by 21% year-on-year. A Havell’s gross margins collapsed by 583 basis points, causing Ebitda margins to fall by nearly 400 basis points, despite revenues up 15.4% year-on-year.

Software vendors continue to report strong numbers in both revenue and earnings as they benefit from growing demand and execution remains top-notch. The recovery has allowed retailers to get back on track. Bhel turned Ebitda positive during the quarter. Shoppers Stop, for example, became debt-free in Q3FY22, posting self-sustaining revenue growth of 34% year-over-year, albeit from a low base.

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