India Inc’s operating profit margin narrows by 2.37% in Dec quarter due to inflation and energy costs: Icra Ratings

According to Icra Ratings, India Inc’s operating profit margin narrowed sharply by 2.37% to 16.3% on an annual basis in the December quarter, primarily due to inflation and rising energy costs. However, when viewed sequentially, the operating profit margin expanded by 1.80% over the preceding September quarter. This was attributed to the easing of input costs and price hikes by many companies.

The agency noted that while price hikes and input cost reductions can boost margins in the short term, geopolitical tensions, recessionary concerns, and forex volatility continue to pose risks. The revenue of companies, excluding those in the financial sector, grew by 17.2%, as expected, with hotels, oil and gas, auto, airlines, and power sectors leading the way. However, the revenue growth was muted at 1.4% from a sequential perspective due to inflationary headwinds weighing on consumer sentiments.

Icra Ratings’ sector head, Sruthi Thomas, stated that India Inc’s ability to improve earnings will depend on factors such as energy cost inflation, evolving recessionary trends in developed markets, and fluctuations in foreign exchange on both imports and export-oriented sectors. The interest coverage ratio for the agency’s sample, adjusted for sectors with relatively low debt levels like IT, FMCG, and pharma, witnessed a moderation in Q3FY23 to 4.3 times from 5.1 times sequentially. This indicates that companies are becoming more leveraged, posing risks to their financial stability.