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Commodity slump set to halve Q4 operating profits, toplines: Crisil

The plunge would be led by key commodities like steel, aluminium, natural gas and petrochemicals, which have softened significantly, impacting realisations.

March 28, 2019 / 07:53 PM IST

The slump in commodities prices will have the revenue realization of India Inc in March quarter revenue at 8-9 percent, crimping their operating margins to 7 percent, says a report.

While growth in operating profit is expected to nearly halve to 7 percent from 13 percent average in the preceding three quarters, topline growth will also halve to 8-9 percent from the average 16.5 percent in the past three quarters, a Crisil report said Thursday.

However, the expected softening in prices of most of the common commodities and crude oil on year-on-year basis is expected to limit margin erosion as end-use sectors will benefit from lower input prices, it said.

The plunge would be led by key commodities like steel, aluminium, natural gas and petrochemicals, which have softened significantly, impacting realisations, the report added.

"Sectors linked to commodities and infrastructure had been supporting revenue growth for the past few quarters. However, this trend has reversed in the fiscal fourth quarter. Steel, aluminium, natural gas and petrochemicals are expected to witness lower realisations on-year, and sectors like construction and capital goods are also likely to grow slower," the report said.

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Additionally, automobiles, one of the key sectors driven by consumption spending, continued to reel under demand slowdown given higher cost of ownership and new axle norms, among other factors, he added.

However, the decline in revenue growth would be cushioned by other consumer sectors like the retail sector. Retail has support from positive demand sentiment, while airline services stand to benefit from a sharp increase in domestic fares this quarter, the report added.

Export-linked sectors including IT services and pharmaceuticals will also gain from a weakening rupee on a year-on-year basis, though it has strengthened quarter-on- quarter, it added.

With lower topline growth, India Inc is staring at dampened profitability at the operating level as well.

"Domestic prices of coal, long steel, flat steel, and aluminium are expected to be lower by 2 percent, 1 percent, 0 -0.5 percent and 4 percent, respectively, in the fourth quarter. Additionally, oil prices are expected to soften by 5 -6 percent, while the rupee would be 10 percent weaker," the report said.

Thus, while lower realisations for commodities will impact revenue growth this quarter, a fall in commodity prices will lend support to profitability for end-use sectors, he added.



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PTI
first published: Mar 28, 2019 07:44 pm
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