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Profit margin blues for India Inc
Fri, 13 Jan Pre-Open

The last two quarters were a big disappointment as far as the operating profits of India Inc was concerned. High interest rates, rising commodity prices and weaker rupee impacted the profitability of most companies. According to news report, not a single brokerage is upbeat on India Inc's results for the upcoming quarter (3QFY12). Indian companies are likely to report a 2% drop in operating profit margins in 3QFY12. While revenue growth is expected to drop following a slowdown in consumption growth and sluggish investment activity, the pressure on net profits would be more acute.

Let us take a sneak peak of how operating profit of some of the sectors are expected to fare in the coming quarter.

Automobile: The successive interest rate hike undertaken by the Reserve Bank Of India (RBI) to curb inflation has dented the demand for automobiles. The price hikes implemented by auto companies over the past year may boost revenues in the past quarter, barring Maruti Suzuki. Input cost has also been high during the quarter and any fall in input prices is expected to be negated by adverse currency movements which will keep operating margins under pressure.

Real Estate: Although this quarter is expected to be seasonally strong due to the festive season, the operating profit of companies is expected to be muted due to approval delays and liquidity concerns. Overall, we expect developers to offer a cautious sales guidance for the next six to nine months due to slowing demand and high interest rates.

Capital Goods: Operating profit will continue to remain under pressure due to execution issues and rising input costs. Slowdown in the power sector due to coal shortages and environmental issues will continue to impact the order pipeline of power equipment manufacturers.

Pharmaceuticals: This sector is expected to come out with strong numbers led by gains from the rupee's depreciation. Export oriented firms are expected to report strong margins on the back of improved realisations.

India Inc is expected to post worst operating profit in two years. Going forward, we believe that unless the interest rate environment turns conducive and government comes to a meaningful conclusion from policy perspective, performance of India Inc will continue to remain lukewarm in the near future.

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