Brokers feel input costs will drag Q4 revenues

The rise in commodity prices over the past six months is seen to be one of the key risks to the earnings outlook for India Inc.

But the expectations of the Street from the January-to-March quarter results suggest that the margin scenario is not expected to deteriorate much in Q4.

Edelweiss expects average EBITDA margins for about 150 companies under its universe to come in at 21 per cent, around the same level at which the number has been hovering in the first three quarters of this year.

Motilal Oswal too expects a 20 per cent average margins for the 137 stocks that it covers in the various sectors.

“However, as we move into FY12, headwinds from rising costs will continue to challenge the margins' trajectory,” notes Edelweiss, implying that may only be a matter of time before input price inflation sinks in, impeding margin expansion.

Although the overall picture does not appear to be bad, a few sectors are expected to bear the brunt of input price spikes, year-on-year (yoy). Metals are expected to be hit by the rise in coking coal, iron ore and steel prices and telecom, by falling ARPUs, leading the 100-150 basis points contraction in margins for the coverage universe of the above mentioned brokerages.

Angel Broking expects margins of steel companies to contract by huge 400-840 basis points yoy.

Well, if you had been thinking why the auto sector — considering the run-up in steel, lead and rubber prices — does not figure right on the top of that list, it is because auto makers have so far been able to periodically pass on price increases to customers, thanks to strong demand. Alongside oil and gas (rise in crude and natural gas prices), metals (improved realisations), retail and banking, the auto sector figures among the top five in terms of revenue growth (yoy) expectations for this quarter.

For all the sectors put together, these brokerages expect a 21-27 per cent top line growth this season for the companies they cover. This is higher than the 18.5 per cent growth achieved in the third quarter by these companies, shows the Motial Oswal report.

On a sequential basis, though, thanks to the stronger order inflow and a pick-up in execution, the construction and capital goods sectors are expected to do well.

The above sectors are also broadly those whose profits are expected to grow most, with the projections for profit growth between 16 and 18 per cent (yoy).

While the strong demand and ability to pass on costs are keeping the sales growth going, net profit growth seems to be slowing, going by Motial Oswal's numbers for its universe. According to them, PAT, which by grew 41.5 per cent (yoy) in the September quarter, slowed to 25 per cent in the December 2010 quarter, and is projected to slow further in Q4 — reflecting the cost pressures.

This has happened at a time when there is no particular slowdown in the demand.

It remains to be seen how far companies can increase prices to protect profitability, without affecting demand.

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