SENSEX NIFTY
Jun 27, 2012, 01.56 PM IST | Source: CNBC-TV18

Margins, topline to see pressure in Q1FY13: CRISIL Research

A report recently released by CRISIL Research finds that India Inc will not fare too well this earnings season.

A report recently released by CRISIL Research finds that India Inc will not fare too well this earnings season. According to the firm, companies will face pressure on margins as well as revenue growth.

“Shipping, airlines, hotels, auto, especially the passenger car segment where we are seeing very significant pressure, and housing is where we are seeing very marginal growth in volumes,” said Prasad Koparkar, senior director of CRISIL Research.

The firm expects revenue growth to come in around 14% only, compared to 17% in the previous quarter.

Koparkar goes on to say that margins will come in flattish for this quarter, and decline 100-150 basis for the whole year. “There are few sectors which are driving it, but out of 26 sectors that we studied almost 15 sectors will see a marginal fall even on a sequential basis,” he explained.

He further adds that banks will also face stress on their asset quality, and that overall non-performing assets will go up to 2.8-2.9 for the sector.

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: What exactly are you expecting from the banking space this time around, especially on asset quality? Do you expect the sort of trends we saw in restructured loans to continue this time around?

A: Yes. I think asset quality pressures in the banking sector are going to continue. We have seen the overall non-performing assets (NPAs) going up to close to 2.8-2.9 and we believe that in the next one year they will go up another 30-40 basis points. So we see continued pressure, both in terms of NPAs as well as restructured assets.

Q: Your report says that aggregate sales growth in the first quarter will rise by only 14%, lower than the 17% increase in the quarter that just went by and even in the year ago quarter. How does this pan out sectorally are there some sectors where aggregate revenue actually declines?

A: There are sectors where things are actually declining, like in shipping, airlines, hotels and auto, especially the passenger car segment where we are seeing very significant pressure. I think housing is another sector where we are seeing very marginal growth in volumes and prices are also not going up. So these are the sectors we are seeing very sharp deceleration in revenue growth.

Q: You have said that EBITDA margins would actually increase in the first quarter. Where would these margin improvements come, from which sectors or companies?

A: Let me just clarify, margin improvement on a year on year basis is not there. On a year on year basis we are seeing a 100-150 basis point decline, but on a quarter on quarter basis yes margins will be flattish. There might be a small uptick of 30-40 basis points, but it is very skewed. There are few sectors which are driving it, but out of 26 sectors that we studied almost 15 sectors will see a marginal fall even on a sequential basis.

Q: In terms of bottom-line, where could we possibly see a loss making P/L this time and which sectors could we expect that from?

A: Interest costs are going up significantly, but on the other hand there is one compensating effect which is the deprecation. Give the very sharp deceleration in investment cycle, we are seeing depreciation costs as a percentage of sales at a ten year low. So it is compensating to some extent.

Also, the EBITDA margin pressure is abating, I won’t say it is now going to turn positive. If you look at the last year, almost every quarter saw a year on year decline in the range of 200-300 basis points. We believe that this year that range is going to be much narrower, maybe 100 basis points or so.

Q: Your report is speaking about the first quarter, the quarter that will start reporting numbers. How will you extrapolate for subsequent quarters? Will revenue growth continue to be 14%, will margins continue to improve and do you have a number for the full year?

A: Full year we don’t have a precise number. If you look at what is really been holding on the revenue growth for last one year, it has been consumption because the investment cycle had slowed down. Our sense is that there will be strain now, even on consumption given that consumer sentiment is getting impacted and inflation is very high.

So private consumption, which is almost 60% of the GDP, will come under pressure. Even early signs of monsoons are not too good, almost 25% below normal now in June, so my sense is that revenue growth is very unlikely to surprise on the positive side.

Q: Do you have a working number for EPS growth for the current year, say a Sensex EPS number that you are looking at?

A: No, we don’t have a number on the EPS. But on EBITDA level we believe that unlike the 200 basis point decline that we saw, we will see close to about 100 bps.

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