InvestorQ : How badly are the operating profit margins of Indian companies being hit by inflation?
Priyanka N made post

How badly are the operating profit margins of Indian companies being hit by inflation?

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Neelam Naik answered.
2 months ago
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The pressure on operating margins were already visible in the third quarter but the situation has become graver now that the Ukraine conflict has added to the commodity cost problems. The crisis began with a spike in prices of many commodities including crude oil, aluminium and coal. In addition, most of the food companies have also reported sharply higher inflation on inputs like palm oil, food related inputs etc.

A recent research report by Jefferies has pointed out that input inflation was a serious problem for 7 major sectors. These include automobiles, consumer staples, consumer discretionary, industrials, pharmaceuticals, cement and chemicals. These 7 sectors account for 24% of Nifty. However, other major sectors like banks are facing higher borrowing costs while IT is facing higher manpower costs. Here, EBITDA margins are likely to be impacted.

If you look at the sectoral indices since the Russia-Ukraine war began, the Nifty Auto index lost -12.5% while the Nifty metals index gained 7%. For autos, the raw material basket has increased 160 bps sequentially due to spike in aluminium and precious metal prices. Price hikes have increased the cost of ownership for two-wheeler consumers by 15-16% yoy, which has hit demand badly. The same is true for four-wheelers too.

The more structural concern is the downstream impact on companies when the price of petrol and diesel are raised; possibly late on 07-March. Fuel price hike of Rs.15-20 is expected and that will not only raise fuel costs but also the cost of transport, freight and logistics. FMCG sector is already hit quite badly by the spike in crude prices as well as a spike in the price of palm oil and packaging costs. With coal and gas prices also up at new highs, the input cost problem is a full circle.

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