Metal headache: Commodity rally will put pressure on operating margins

The maximum impact would be felt by companies in metal-intensive sectors such as automobiles, capital goods, and consumer durables

The recent rally in metal prices would prove expensive for India Inc, which is still recovering from the demand shock and economic disruption caused by demonetisation and the roll-out of the goods and services tax.

Analysts expect cuts in corporate margins in the forthcoming quarters, given the negative correlation between metal prices and operating margins of domestic manufacturers.

Historically, domestic manufacturing companies (excluding energy, metals, and mining players) have reported higher core operating margins when commodity prices, including metals, have been low and vice versa (See adjoining charts).

The benchmark LME index on the London Metal Exchange (LME) is up