Corporate profitability to decline for fourth consecutive quarter: Crisil

Corporate profitability is seen declining 300 basis points (bps) due to elevated commodity prices, Crisil said in a report.

On its part, corporate profitability -- or earnings before interest, taxes, depreciation and amortisation (Ebitda) margin -- contracted 300 basis points (bps) on-year in the second quarter, marking the fourth consecutive quarter of on-year decline.

The margin contracted sequentially as well, albeit slightly.

Ebitda margins of 70 per cent of the 47 sectors tracked by CRISIL Research shrunk on year. The sharpest reduction was in construction-linked sectors, at over 1,000 bps on-year, largely due to high input costs and delay in passing those on to customers.

Among these sectors, Ebitda's margin in steel products is likely to have contracted by 1,500 bps on-year due to elevated coking coal prices and lower realisations amid a drop in flat steel prices and sales to the lucrative export segment are limited.

Says Sehul Bhatt, Associate Director, CRISIL Research, "Rising revenue momentum is not translating into profit margin proportionately. Although key commodity prices such as coking coal and crude oil have cooled sequentially, they remain elevated on-year, eating into corporate profits, with absolute Ebitda profit remaining flattish during the quarter, both on-year as well sequentially. Sustenance of commodity prices at current levels is crucial to limit further margin contraction."

A combination of factors such as moderate price hikes and steadily rising volumes is expected to lift corporate revenue 15 per cent on-year to Rs 10.2 lakh crore in the second quarter of this fiscal.

CRISIL's analysis of over 300 companies (excluding those in the financial services, and oil and gas sectors) indicates as much.

Of the total 47 sectors tracked by CRISIL Research, nearly half are estimated to have outpaced overall revenue growth during the quarter, with key sectors within consumer discretionary services logging maximum on-year growth.

The underperformance of the remaining sectors compared with overall growth was largely broad-based across the construction-linked, consumer staples, and industrial commodities verticals.

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