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Corporate profitability to be under pressure in Q4FY2011, says CRISIL

Rising commodity prices, interest rates and intense competition, which is limiting the pricing power of corporate, would affect the profitability of Indian companies in the fourth quarter, according to the ratings agency

Ratings agency CRISIL has said that it expects profitability of Indian companies to be under pressure during the January-March 2011 quarter (Q4FY11) due to rising raw material costs and increased competition.

"Going ahead, we expect the operating profit margins (OPMs) to remain under pressure due to rising commodity prices. In addition, intense competition is limiting the pricing power of corporates, and players are being forced to largely absorb the rise in input costs. The rising interest rates will also impact net margins," said Nagarajan Narasimhan, director-CRISIL Research.

During Q4FY11, the rising costs of inputs are likely to put pressure on the margins of automobile manufacturers as well as cement producers. In IT services too, margins are expected to remain under pressure on a year-on-year (y-o-y) basis due to the appreciating rupee and wage inflation, Mr Narasimhan said in a report.

On the positive side, the anticipated increase in steel prices and strong demand would offset the impact of rising input costs for steel players, for whom margins are expected to improve in Q4FY11. Similarly, for yarn manufacturers, operating margins are likely to remain stable, as players would pass on the rise in raw material costs to consumers by hiking product prices and altering the raw material mix by using more polyester, the report said.

The ratings agency said, based on an analysis of the aggregate financial performance of select companies, excluding the oil refining and marketing companies across 23 industries, revenue growth is expected to be higher on a y-o-y basis, while OPMs are expected to be lower.

Revenues, which grew by 22.4% y-o-y in October-December 2010 (Q3FY11), are likely to decelerate to 20-21% in Q4FY11. The expected growth in revenues is significantly higher than the 13.7% growth witnessed in January-March 2010 (Q4FY10).

CRISIL Research said it expects the operating profit margin to decline to around 22-23% in Q4FY11, from 26.1% in the previous corresponding period. In Q3FY11, the operating profit margin of Indian companies stood at 26.1% compared to 26.7% in the corresponding period a year ago, and 25.2% in Q2FY11.

Prices of key raw materials such as aluminium, rubber, coking coal, steel and iron ore increased due to rising demand and constrained supply, owing to weather-related events (such as the recent floods in Australia), thereby exerting pressure on margins of automobile and auto component manufacturers.

In IT services, operating margins slipped as the rupee appreciated by 3.7% y-o-y against the dollar and employee costs rose due to high attrition and wage inflation. CRISIL, which is a unit of Standard & Poor's, the international ratings company, said that in contrast, operating margins in sectors such as organised retail, shipping and textiles showed an improvement. In organised retail, margins rose due to increasing product prices. Although raw material costs increased sharply in cotton yarn, manufacturers were able to pass on the hike owing to robust demand.

"Corporate India's performance in Q3FY11 was in line with our expectations. The strong revenue growth during Q3FY11 can largely be attributed to the consumer confidence and also the low base in the corresponding quarter of the previous year," Mr Narasimhan said.

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