X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Margin pressure: Who will come out unscathed? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 14, 2006

    Margin pressure: Who will come out unscathed?

    1QFY07 has passed us by and record numbers achieved by India Inc must have definitely soothed a lot of frayed nerves out there. However, bygones will be bygones and everyone is now focusing on what the coming quarters will bring with them. Uppermost on their minds would be the input cost pressures that were being witnessed during 1QFY07 and which is further likely to intensify, apart from the threat of a hike in interest rates. The impact of these two factors, however, is not going to be uniform across-the-board. In this write-up, we examine as to which sectors are in a better position to tackle these twin demons in the coming quarters.

    What happens if all other things remain constant during 2QFY07 but input as well as interest costs both increase by 100 basis points (assuming the companies are equally funded by debt and equity). Let us see by how much the profit decreases due to the above-mentioned factors if the profit levels of all the sectors are assumed to be at 100.

    As seen from the chart above, commodities like cement, steel and aluminium have emerged as the sectors which will be hurt the least in case of hike in input and interest costs on the basis of performance in 1QFY07. It should be noted that the magnitude of impact is inversely related to the kind of margins the companies enjoy. In other words, higher the margins the lesser the impact. Hence, what could also be concluded from the above charts is the fact that among all the sectors featured above; cement, steel and aluminium are the ones with the highest profit margins. On the other hand, sectors like textiles, auto and engineering have witnessed the lowest margins.

    However, we would like to point out that arriving at a proper conclusion on the basis of just one quarterly set of numbers would be akin to aiming at a dartboard. All the sectors should be evaluated on the basis of their performance over a long-term period, a minimum of three to five years. If this criterion is taken into account, then is the same picture going to emerge? We are of the view that the top three sectors in the above chart are unlikely to find a place under the new criteria. This is because these sectors are cyclical in nature and at present they are going through a cyclical upturn and hence the buoyant margins.

    It should be remembered that these sectors have been benefiting from high prices of their products in recent times and as a consequence, have been generating record revenues as well as cash flows that enable them to clean up their balance sheets. Thus, on account of their higher margins, they are currently less vulnerable to input price pressures. But if the realisations cool off a bit, which is not unusual, it does not take the margins long to take a U-turn. Therefore, it is advisable to stick to companies in those sectors where debt funding is kept to a bare minimum and where tight control is being exercised over costs.

    Now, what about the other sectors in the pecking order, viz. software and FMCG. These sectors are characterised by consistently high operating margins and virtually debt-free balance sheets. As mentioned above, since the impact of cost escalation is inversely related to margins, these sectors are likely to come out of the period of cost inflation with minimum damage. Also, since the levels of debt are at a bare minimum, a rise in interest expenses is not likely to affect these companies much, as compared to companies with substantial debt on their books.

    To sum up, we would advise investors to ask two basic questions before taking their investment decisions - does the sector/companies has/have a track record of consistently high margins and virtually debt-free balance sheets? If the answer to both these questions is yes, then you have got before you an attractive investment proposition. Everything however, will come to nought if the price-value equation is not in your favour.

     

     

    Equitymaster requests your view! Post a comment on "Margin pressure: Who will come out unscathed?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS