Corporate earnings likely to fall 200 bps in Q3:Crisil

The corporate earnings are expected to fall by two percentage points to 17.7 percent due to increased interest costs and marked-to-market losses in the third quarter, according to an analysis by Crisil Research.

Crisil expects corporate India to report a 200 basis points (bps) decline in earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins in the December quarter.

"Ebitda margins are expected to drop to around 17.7 percent in the October-December period, while revenue growth is forecast to drop to 14-15 percent from a far healthier 22.5 percent in Q3 last fiscal, following a slowdown in consumption growth and investments," Crisil's Head for Industry and Customised Research Prasad Koparkar said.

Based on an analysis of the aggregate financial performance of select companies across 21 industries (excluding banks and oil companies), Crisil expects corporate India to report a 200 bps decline in EBITDA margins in Q3 from 19.7 percent in Q3 last fiscal.

Companies with substantial debt on their balance sheets will be further hurt by rising interest costs and marked-to-market losses on foreign debt and derivatives due to the depreciation of the rupee. Net margins are, therefore, likely to decline even more sharply, it said.

"While the pressure on margins will be felt across industries, textiles, real estate and hotels will see a sharp drop of 300-500 bps, mainly due to slower volume growth and high raw material and wage costs. On the other hand, Ebitda margins for the auto, steel, and organised retail players are likely to decline by 100-200 bps," Koparkar said.

Airline companies are expected to report robust volume growth, but their Ebitda margins will remain under pressure, as these companies will be unable to fully pass on the sharp rise in fuel costs, he said.

For cement manufacturers and telcos, though volume growth would be muted, increased realizations will lend stability to profit margins.

The rupee depreciation will not hurt all corporates, though. Companies with substantial export earnings such as IT services companies, bulk drug exporters, pharma companies that focus on formulations exports, and oil exploration companies with low proportion of debt on their balance sheets, stand to gain from a weak rupee as their profitability will improve.

IT companies derive more than 85 percent of their revenues from foreign customers. For bulk drug players, exports are about 80-85 percent of their revenues, while for companies in formulations, export earnings are about 40 percent of revenues.

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