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Revenue growth set to slow considerably
Thu, 28 Jun Pre-Open

High interest costs and high commodity prices are wrecking India Inc's profit margins. But the bottom line of companies may not be the only thing in trouble. According to leading rating agency Crisil, leading corporates are expected to show their weakest sales growth numbers in six quarters. Revenue growth in the first quarter of the new fiscal year is forecast to drop to around 14% from 17.5% earlier, given the economic slowdown and a fall in investments. Accordingly, operating margins are also expected to drop 1-1.5% to around 19-20%.

A number of sectors are seeing multiple negative headwinds. There have been a number of structural problems as well as demand deceleration in airlines, auto components, hotels, metals, and real estate companies. According to the rating agency, for certain sectors such as cement, construction and real estate margins are expected to contract by 1-2% on slower demand and high input costs. But the rupee depreciation may have a silver lining for export oriented companies in the IT and pharma space. These sectors may see significant margin expansion on this count.

The important question is as to how things will pan out going forward. Well, interest rates are still expected to remain elevated. To the surprise of the industry, the Reserve Bank of India (RBI) decided to maintain status quo in its latest policy review. This was despite GDP growth in FY12 reaching a 9 year low. Policy inaction and the souring of the investment cycle are also expected to keep things difficult. Persistent inflation and economic uncertainty both domestically as well as overseas are also expected to add to the pressure.

There seems to be no concrete resolution to the European debt crisis and even the US seems to be struggling. All these factors are weighing in on consumer sentiment, thereby affecting consumption growth and consequently sales growth of companies. And with these problems expected to persist for the next few quarters, we don't really expect much of a recovery in FY13. It will take some time for these issues to sort themselves out.

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