Soaring logistics, raw material costs headache for India Inc in H2: Report

Even though the overall outlook for corporates have improved on the back of faster than expected recovery, and the same is likely to gain further traction in H2 but the rising commodity prices and logistics cost pose headwinds to their profitability, a report said without quantifying it.

The economy has made a faster turnaround with the impact of the pandemic fading and favourable financing and external demand conditions. This has many analysts revising up their real GDP growth forecast for the year.

Earlier in the day, Swiss brokerage UBS Securities revised upwards their growth projection for FY22 to 9.5 per cent growth, from the 8.9 per cent they projected in September. Meanwhile, PMEAC chairman Bibek Debroy sees the economy clipping at 10 per cent.

In a report on Wednesday, rating agency India Ratings said entities with a strong market share and healthy balance sheet will continue to show strong earnings in H2, although margin may moderate, commodities dependent sectors will face challenges in the complete pass-through of input prices.

The agency's upgrades-downgrades trend highlights strong cash flows in manufacturing and services companies, which have aided them to improve credit profiles by deleveraging and reducing debt, it said.

However, despite rising commodity prices and logistics coast, which pose challenges to the general economic recovery as it could dampen consumer demand, the report observes that since the second wave, especially since Q2FY22, the risk appetite in the system has improved largely driven by strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy, which it expects to remain conducive in 2HFY22.

Additionally, elevated commodity prices can also hurt household demand, unless compensated by higher real income growth, which is not happening anytime soon.

Though easy money is a precursor for corporate Capex, especially in the aftermath of the crisis, owing to the tepid domestic demand, large Capex activities are still not visible, barring in a few pockets, it said.

It is the same ultra-loose monetary and fiscal policies across the globe that has pushed global commodity prices to a multi-year high and also pushing inflation globally, the agency added.

However, the report said the outlook is improving for corporates as it expects the economic recovery to gain further traction in 2H, backed by the fading impact of the pandemic and favourable financing and external demand conditions and expecting most sectors to witness a surge in demand. Coupled with this is the fiscal and monetary measures, which have backed economic activities by maintaining adequate liquidity.

On the positive side, the report expects high commodity prices to boost demand for working capital loans in H2 FY22, thus pushing up the demand for short-term funds.

On the looming risk of supply-side disruptions due to the massive spike in logistics cost, the report said, if it persists, the global recovery will also be impacted.