Corporate profitability set to fall in Q4, as companies unlikely to pass input costs pressure to buyers: Report

Companies are not able to pass on the pressure from rising input costs to buyers, and this is likely to result in a compression in corporate profit margins for the March quarter, a report said on Monday.

Operating profit margins for companies are set to fall by as much as 3 percentage points compared to the year-ago period, and up to 0.60 per cent as compared to the preceding December quarter, the research wing of rating agency Crisil said in a report.

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The report comes ahead of the earnings season when major companies start reporting their profits

The report said this will be only the second quarter in the last three years when profit margins have narrowed against the year-ago period.

For the entire fiscal (FY22), Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) or operating profits are likely to shrink by up to 0.40 per cent to 21-23 per cent, its director Hetal Gandhi said.

"Companies were unable to fully pass on soaring input cost, especially prices of key metals and energy," Gandhi said, adding that given the Russia-Ukraine conflict and its impact on commodity prices, there will be a further 1 percentage point shrinkage in the profit margins in FY23.

In March quarter, margins in construction-linked sectors are likely to have fallen the most at up to 6 percentage points, followed by export-linked and industrial commodities sectors where margins are likely to have eroded by 4 percentage points.

There is likely to be a moderate expansion in the profit margins in the consumer discretionary services sector, on the back of tariff hikes by telcos, and in the consumer staples services where the hospital sector's show is set to be helpful.

"In absolute terms, revenue of most sectors and segments rose above their pre-pandemic levels last fiscal," its associate director Sehul Bhatt said, adding that construction, consumer staple services and agriculture sectors have recovered the fastest.

Companies are set to report a revenue jump of 26 per cent in FY22, which will slow down to 14 per cent, the agency said.