Profitability pressures to persist: CRISIL Research Cement, real estate and textiles to see the sharpest fall in 2011-12

April 26, 2011: Rising input costs will cause India Inc's profitability to decline in 2011-12, according to a recent report by CRISIL Research. While the average EBIDTA margins of the 17 sectors (excluding oil & gas and banking) covered in the report are expected to fall by around 1 per cent, sectors such as cement, real estate, textiles and shipping will see a sharper drop in profitability. However, upstream oil companies and integrated metals players, having access to captive natural resources, are expected to beat this trend as the buoyant global prices backed by robust demand will allow an improvement in their margins.

According to the report based on an analysis of a set of companies across these sectors, revenue growth in 2011-12 will be maintained at 18 per cent. Exports driven sectors like IT and Pharmaceuticals are expected to maintain healthy top line growth driven by demand recovery in the US markets. On the other hand, interest rate sensitive sectors such as automobiles and real estate will see sharp deceleration in revenues, after a strong performance in 2010-11.

Given the limited pricing flexibility in most of the sectors, growth will be accompanied by margin pressure as companies will be forced to absorb a part of the rising costs. Accordingly, the EBIDTA margins are likely to decline to 19 per cent in 2011-12 from 20 per cent in 2010-11" points out Prasad Koparkar, Head - Industry & Customised Research, CRISIL Research.

In the context of rising capital costs, the report highlights that corporate India's capital structure however will not be an area of concern in the current year. Gearing is expected to remain comfortable, at less than 1 for nearly three-fourths of the sectors included in the study. "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", adds Koparkar.

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