Rate hike, rise in bond yields, rupee fall to hit India Inc margins

India Inc stares at a further decline in operating margins and profitability in the coming quarters owing to the twin blows of a depreciation in the value of the rupee against major currencies and a rise in interest rates after a surprise intervention by the Reserve Bank of India (RBI) last week.

Analysts say the depreciation in the rupee, which touched a new low against the dollar on Monday, will raise the rupee prices of key industrial inputs such as oil, coal, industrial metals, bulk chemicals, agri-commodities, and imported components for manufacturing companies.

The rate hike and the consequent rise in bond yields and upward revisions in lending rates by banks will raise companies’ funding costs.

“Higher raw material and energy prices have begun to affect corporate profitability. Most non-financial companies reported a margin contraction in the last two quarters and things could get worse in FY23,” said Dhananjay Sinha, managing director (MD) and chief strategist, JM Institutional Finance.

He expects up to a 20 per cent cut in the Nifty50 companies’ forward earnings estimate for FY23. Listed non-financial companies’ raw material and power and fuel costs grew faster than net sales for the fifth straight quarter in Q4FY22. 

Combined raw material costs for listed non-financial companies were up 42.4 per cent year-on-year (YoY) in Q4FY22 while their power and fuel costs were up 30.2 per cent. In comparison, the companies’ net sales were up 27.8 per cent.

Faster growth in input costs forced companies to take a hit on their margins. Their profit before interest, depreciation and tax (PBDIT) margin in Q4FY22 declined to a seven-quarter low of 21.1 per cent of revenues. The margin was 21.5 per cent a year ago and peaked at 23.2 per cent in Q2FY21.

Companies’ core operating profit margin -- operating profit excluding other income and exceptional gains and losses -- declined even faster. It was down 77 basis points YoY in Q4FY22 to 18.4 per cent of net sales, the lowest since Q1FY21.

The core margin had peaked at 20.5 per cent in Q1FY22. The non-financial sample includes 302 companies excluding banks, non-banking financial companies, insurance firms, and stockbrokers.

“Last year our PBIDT margin was around 26 per cent, and it has declined to 20 per cent due to higher energy and raw material costs. The margin may remain at current levels unless there is a decline in energy prices,” Dalmia Cement (Bharat) MD and Chief Executive Officer Mahendra Singhi told Business Standard.

India Inc faces challenges from a rise in employee and interest costs, both of which have bottomed out and are steadily rising now. According to analysts, while faster growth in salary and wages largely affects the margins of IT services companies such as Tata Consultancy Services, Infosys, and Wipro, higher interest costs will be a headache for banks and non-bank lenders.

The combined interest costs for all 370 listed companies in the sample were up 2.7 per cent YoY in Q4FY22, growing at the fastest pace in two years. For comparison, the interest costs for companies were down 9.8 per cent YoY in Q4FY21.

Analysts say a bigger challenge for India Inc would be the expected decline in aggregate demand and thus lower top line growth.

“A rise in lending rates could adversely affect growth in retail credit, which will impact demand for big-ticket items such as homes, auto and consumer durables. Higher input costs due to currency depreciation will raise prices and thus affect demand,” said Sinha.