InvestorQ : Is it true that operating profits of India companies have been falling in the third quarter and what are the risks going ahead you see?
Aashna Tripathi made post

Is it true that operating profits of India companies have been falling in the third quarter and what are the risks going ahead you see?

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Aditi Sharma answered.
4 months ago
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If you look at the Q3 Results that have been announced till date, the impact of higher input costs is much steeper than was originally expected. The rising producer inflation or WPI inflation was already indicating that input costs would be higher, but the extent is only visible now that the numbers are coming out. Across sectors, it is a story of companies reporting higher sales but seeing pressure on operating profit growth and OPMs.

This trend is quite clear in a number of sectoral stories. Let us look at FMCG names first. FMCG players have been under strain due to higher crude prices and other input costs. Pharma companies operating profits have taken a hit due to higher costs of intermediates and supply chain factors. For pharma, top line has also been hit by weak US markets.

What about infra, cement and IT companies. Infrastructure companies were hit by high construction, labour and material costs. For cement, cost of freight, transport, fuel and power put pressure on OPMs. Even the IT sector saw pressure on operating margins of between 200 bps and 400 bps. The reason was a sharp spike in manpower costs due to high levels of attrition. Top line growth is still robust.

The X-factor going ahead is borrowing costs. With bond yields already up and likely to scale up in line with rising interest rates, expect pressure on the cost of borrowings for Indian corporates. High debt companies may just come under a lot of strain if the rates were to harden further from the current levels.

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