Profit margins remain under pressure
“Rising input prices are a concern for seven sectors (Automotive, Consumer Staples, Discretionary, Industrials, Pharmaceuticals, Cement and Chemicals), which together account for 24% of Nifty’s weight,” Jefferies analysts said. India Pvt. Ltd in a statement. March 3 report. Jefferies analysts expect Ebitda margin expansion of 50 to 250 basis points (bps) in these sectors in FY23. This could lead to cuts, according to the brokerage firm. Ebitda is Earnings Before Interest, Taxes, Depreciation, and Amortization One basis point is 0.01%.
The longer the conflict lasts, the more devastation and economic pain looms. Against this backdrop, additional risks of disruption to the global supply chain persist. In addition, long delivery times would increase the cost of importing raw materials. Thus, companies that raised prices in the December quarter can be expected to have some short-term cushion to their margins.
Understandably, stock markets are anxious. Since Russia invaded Ukraine in the early hours of February 24, the Nifty50 index has lost 4.8%. Among sector indices, the Nifty Auto Index was the biggest loser, down 12.5%. Simultaneously, the Nifty Metal Index gained 7% on an anticipated increase in price realizations.
For the automotive sector, the road has become more difficult. Kotak Institutional Equities analysis shows Automotive OEM (Original Equipment Manufacturer) commodity basket prices rose 90-160bps in Q4FYTD22 and 170-360bps on price current spot versus Q3FY22 levels due to the strong increase in aluminum and precious metals prices. . Kotak expects Maruti Suzuki India Ltd and two-wheeler manufacturers’ gross margins to be the most affected.
Already, price hikes by OEMs to combat cost inflation and rising retail fuel prices have increased the cost of ownership for consumers. “Total cost of ownership for two-wheeler consumers increased 15-16% year-over-year (yoy) in fiscal year 2022,” Kotak analysts said.
In addition, retail fuel prices are expected to rise after the Assembly elections, which could further impact demand. However, it remains to be seen how much retail fuel prices will rise, with some expecting the government to also cut excise duties to soften the blow to consumers. On Friday, Brent prices closed at $123.5 a barrel.
For the fast-moving consumer goods industry, rising crude prices are increasing packaging costs. The sharp rise in palm oil prices does not bode well for many consumer companies.
International coal prices have also soared. Petroleum coke derived from crude oil (petroleum coke) and coal are key inputs for cement manufacturing, which is not good news for the sector. “Imported coal/petroleum coke prices have increased by 40% compared to the December 2021 release due to the current geopolitical tension, while domestic petroleum coke prices have also increased by approximately 24% by month-to-month in March 2022,” said ICICI Securities Ltd. and fuel costs are estimated to represent 25-30% of the sector’s total operating costs.
Meanwhile, Coal India Ltd (CIL) is set to benefit from higher electronic auction premiums over Fuel Supply Agreement (FSA) prices. In addition, FSA price increases are expected. However, the overall increase in coal prices would weigh on the electricity sector. “India is already struggling with a shortage of coal as CIL supplies fall short of demand due to an upswing in industrial activity. In addition, rising world coal prices make imports inaccessible to many power companies. This is a difficult situation as we head towards the peak of electricity demand in the summer season,” said Rohit Natarajan, analyst at Antique Stock Broking Ltd.
In addition, rising global gas prices are expected to lead to an upward revision to domestic gas prices in FY23. This would squeeze margins for town gas distribution businesses and could also hurt volumes. In addition, high liquefied natural gas prices would make imports more expensive.
It is true that companies can raise prices and pass the burden of increased operating costs onto end consumers, but the subdued demand environment makes it difficult to do so.
Companies in the cement sector have tried to raise prices several times over the past two quarters, but most of the time they had to be canceled due to weak demand.
As such, the general spike in energy prices is a pressing concern. “We are struggling to see prices stabilizing and holding at these levels (Newcastle coal at $260/t, spot LNG at +25 MMBtu or Brent at +$110/bb) because ultimately final demand would decline more prices would remain at such levels. wrote Pinakin Parekh, analyst at JP Morgan India Pvt. Ltd, in a March 2 report. He added: “The problem, however, that we see is that energy prices are unlikely to collapse from here very quickly and the new normal could be for prices to be in a range. close to current levels. The problem for Indian policymakers is not just limited to retail oil and fuel prices, although this attracts the most attention from investors, but also applies to gas and coal.
Oil prices had risen 50% in the 12 months to February 23, even before Russia invaded Ukraine. The outlook is firm. “Even if the Russian-Ukrainian conflict soon subsides, rising oil prices are here to stay. The push towards decarbonisation and clean energy has meant companies have underinvested in investments to boost production since 2019. This would cap global market supply in a world slowly recovering from the covid pandemic -19, creating upward pressure on prices. said Ritesh Jain, global macro investor and former executive at BNP Paribas Asset Management India Pvt. ltd.
For now, global geopolitical uncertainty makes it difficult to determine how long commodity prices will continue to rise.
However, the short-term outlook would largely depend on the flow of news arising from the ongoing conflict. Some developments to watch are the type of sanctions imposed on Russia, whether the Organization of the Petroleum Exporting Countries increases oil production and whether China comes to Russia’s aid.
That said, fears of eroding profitability and increased uncertainty dampened investor sentiment. “We recently cut our Dec’22 Nifty target to 17,500. The growing threat of a twin deficit, rising rates and declining global liquidity suggest yields are likely to remain weak in the near term,” the report said. Jefferies.
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