FY’12 to See Decline in India Inc’s Profitability

Date:   Friday , April 29, 2011

Rising input costs and high interest rates will reduce India Inc’s profits this fiscal, especially in sectors like cement, real estate, textiles and shipping, says credit ratings agency Crisil. Because of the limited pricing flexibility in most of the sectors, growth will be accompanied by margin pressures as companies will be forced to absorb a part of the rising costs, it said.

“Accordingly, the EBIDTA (Earnings Before Interest, Depreciation, Tax and Amortization) margins are likely to decline to 19 percent in 2011-12 from 20 percent in 2010-11”, says Prasad Koparkar of Crisil Research. While the average EBITDA margins of the 17 sectors (excluding oil & gas and banking) covered in the report are expected to fall by around one percent, sectors such as cement, real estate, textiles and shipping will see a sharper drop in profitability. It added that upstream oil companies and integrated metal players, having access to captive natural resources, are expected to beat this trend as the floating global prices backed by strong demand will allow an improvement in their margins.

Apart from oil companies, exports driven sectors like IT and pharmacy are expected to maintain healthy top line growth driven by demand recovery in the U.S. markets. However, interest rate sensitive sectors such as auto and realty will see a sharp deceleration in revenues, as high lending rates would push up the amount of capital investment required. The report, also added that India’s capital structure will not be an area of concern in the current year. “Many companies have had significant equity infusions in the last 1-2 years, which coupled with healthy cash accruals has actually resulted in improved capital structure”, says Koparkar.