Rising Raw Material Costs to Hit Profitability Across Key Sectors

Strategic Insights -

The impact of rising raw material costs is expected to be felt across several key sectors in India, with profitability dropping sharply in the fiscal year 2011-12. According to a Crisil Research report, the operating margins of companies in 17 out of 20 services and manufacturing sectors surveyed are likely to decline by almost 100 basis points (bps) to 19% during the fiscal year. Cement, real estate, sugar, and textiles sectors are expected to bear the maximum brunt of the decline in profitability, with aggregate sector operating margins likely to decline by 700 bps, 600 bps, 350 bps, and 250 bps, respectively.

Key Takeaways:

  • The cement sector is expected to be affected the most due to overcapacity, putting pressure on realizations even as higher coal prices and transportation costs impact the inputs side.
  • The textile sector is expected to be affected by the inability of manufacturers to pass on higher raw material costs, thereby putting pressure on margins.
  • Cotton prices have risen from `80-90/kg to `150/kg in the last one year, whereas garment prices have not increased in similar proportion.
  • The shipping sector is expected to be impacted by lower freight rates, while the real estate sector will bear the brunt of lower off-take.
  • Some experts believe the impact could be lesser in the cement sector given cartelization among the players to maintain pricing discipline.
  • Upstream oil companies and integrated metals players having access to captive natural resources are expected to see an improvement in their margins.
  • Revenue growth is expected to average 18% for the sectors surveyed, driven by sectors such as textiles, retail, fertilizers, commodities, and auto.
  • Experts see rising raw material prices and higher inflation continuing over the next two quarters, thereby driving down corporate earnings this fiscal.

Statistics:

  • Operating margins of companies in 17 out of 20 services and manufacturing sectors surveyed are likely to decline by almost 100 basis points (bps) to 19% during the fiscal year.
  • Cement sector aggregate sector operating margins likely to decline by 700 bps.
  • Real estate sector aggregate sector operating margins likely to decline by 600 bps.
  • Sugar sector aggregate sector operating margins likely to decline by 350 bps.
  • Textiles sector aggregate sector operating margins likely to decline by 250 bps.
  • Cotton prices have risen from `80-90/kg to `150/kg in the last one year.
  • Global prices of coal have increased, impacting the cement sector.
  • Freight rates are expected to decline in the shipping sector.
  • Revenue growth is expected to average 18% for the sectors surveyed.

Sources:

  • Crisil Research report on corporate earnings for fiscal 2011-12.
  • Prasad Koparkar, head - industry and customised research at Crisil Research.
  • Manish Sonthalia, senior vice-president at Motilal Oswal Securities.
  • Sonal Verma, economist at Nomura Financial Advisory & Securities.