India Inc.’s margin shines in June quarter, but can it sustain?

In the quarter gone by, easing input costs brought cheer on the operating performance front for Indian companies leading to a sharp recovery in margins.

An analysis by Kotak Institutional Equities showed that the aggregate Ebitda margin of BSE-500 companies (excluding BFSI) surged to a seven-quarter high of 16.4% in the June quarter (Q1FY24). Ebitda is earnings before interest, tax, depreciation, and amortization. “The bulk of the margin expansion came from softer raw material prices, with raw material cost/sales declining by 485 basis points for the universe on a year-on-year basis,” said the Kotak report dated 27 August. With this, in most sectors, margins have recovered to pre-pandemic levels, it added. The improvement in margins was also a function of price hikes taken in the previous quarters by companies in various sectors such as automobiles, paints, and tyres. Severe cost inflation pressure had dented earnings growth of companies in these sectors, thus, softening costs bode well.

The moot question now is whether this trend would sustain going ahead?

“Overall, prices of key commodities such as crude and metals are likely to rise sequentially or stay stable from hereon. The fall in commodity prices seems to be largely over for now, though there is a China slowdown angle which is also playing out,” said Deepak Jasani, head of retail research at HDFC Securities Ltd. Note that prices of some crude-derivatives such as petroleum coke and coal–crucial for cement manufacturers, have started to inch higher again. In its Q1FY24 earnings call, Pidilite Industries Ltd said while the price of key input chemical vinyl acetate monomer was in the range of $850-900/tonne, it could return to $1,000/tonne over the next six months.

According to Apollo Tyre Ltd’s management, while its raw material basket reduced by 2% sequentially in Q1FY24, in Q2FY24, it is expected to be either flat or rise slightly sequentially. That said, the lagged inventory effect may aid some more margin expansion for select companies across sectors.

Meanwhile, in order to protect market share, companies might take price cuts to boost volumes, which may hurt margins. Investors also need to watch out for the impact of deficit/erratic rainfall on rural demand as well as prices of agri-commodities which is crucial for demand revival and overall inflation perspective. The margin expansion theme may have some legs, but a further re-rating in FY24/FY25 earnings would now depend on demand revival in H2FY24 and how the festival season unfolds, added Jasani.

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Updated: 29 Aug 2023, 10:17 PM IST

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