Price Hikes Rather Than Volume Growth Drive Revenue Growth For India Inc: CRISIL

After 11 quarters, the profit margin before interest, taxes, depreciation and amortization (EBITDA) of Indian companies is expected to decline in the third quarter (Q3). While India Inc. has maintained its revenue momentum, it has been driven by price increases rather than volume growth, according to a research note by rating agency CRISIL.

The report says, “The revenues of companies increase 16-17% to 9.1 lakh crore, driven by soaring commodity prices. While revenue growth is as expected, the underlying reasons have changed over the past three quarters. As volume growth continued to underperform, price increases partially offset. “

Corporate profitability, as defined by EBITDA margin, likely fell 100 to 120 basis points (bps) year-on-year and 70 to 100 bps sequentially in the third quarter ended December 31, 2021, shows the CRISIL analysis of 300 companies, excluding those in financial services. , and the oil and gas sectors.

For the first nine months of this fiscal year, according to the rating agency, the EBITDA margin is up 80-100 basis points year-on-year to 22-24%, thanks to last year’s weak base . EBITDA earnings growth is expected to moderate to 10-12% year on year, compared to a scorching rate of around 47% recorded in the first half of this year – a figure which was also bolstered by the base effect weak, he added.

This is the first decline in 12 quarters and up to 27 of the 40 sectors monitored by CRISIL Research are expected to see their EBITDA margins decline.

Drishti Chugh, Senior Research Analyst at CRISIL Research, says: “In absolute terms, revenues for most industries are now above their pre-pandemic levels, with the exception of airlines and hospitality. But sectors related to consumer discretionary products weighed on overall company revenues, which were likely up 7-9% year-on-year on weaker volume growth. Among other segments, the export-related segments continued to perform well with growth of 15-17% year-on-year, although this did not really help maintain their margins. “

In the automotive sector, the sales volume of commercial vehicles is likely to have increased by 8% year on year, while cars and two-wheelers may have fallen by 9% and 20%, respectively. However, achievements could be higher – at 12% for passenger cars and commercial vehicles, 7% for two-wheelers and 9% for commercial vehicles, over one year – due to price increases and a favorable product mix. This, according to CRISIL, would bring overall automotive segment revenue growth to around 4% in one year.

He said: “Lower-than-expected auto production amid a semiconductor shortage would also be reflected in steel sales volume, which likely fell about 7% in one year.”

Hetal Gandhi, Director of CRISIL Research, says: “Companies have not been able to fully pass on soaring input costs, especially the prices of key metals and energy. Prices for flat steel rose 48% year-on-year in the third quarter, while aluminum was up 41%. The price of Brent crude jumped nearly 79%, while spot gas and coking coal prices exploded nearly 5.4 times and 2.4 times, respectively, year on year.

In the consumer business segment, the major players in Fast Turning Consumer Goods (FMCGs) made price hikes of 6-8% in the first half of this fiscal year, and prices likely remained high even in the past. quarter considered.

According to the rating agency, revenues from export-related sectors such as IT services have likely increased by 18-20% in a year, aided by the growing share of digital transformation and the possible resumption of deferred projects. Revenues for pharmaceutical companies are forecast to increase by 6%, while for manufacturers of ready-made garments and cotton yarns, they are up 30-35% year-on-year against a backdrop of higher exports, he said. he adds.

Richard L. Militello