A combination of factors such as moderate price hikes and steadily rising volumes is expected to lift corporate revenue ~15% on-year to Rs 10.2 lakh crore in the second quarter of this fiscal. Profitability, however, is seen declining 300 basis points (bps) due to elevated commodity prices.

CRISIL’s analysis of over 300 companies (excluding those in the financial services, and oil and gas sectors) indicates as much.

On a sequential basis, corporate revenue likely declined 3%.

Of the total 47 sectors tracked by CRISIL Research, nearly half are estimated to have outpaced overall revenue growth during the quarter, with key sectors within consumer discretionary services logging maximum on-year growth. The underperformance of the remaining sectors compared with overall growth was largely broad-based across the construction-linked, consumer staples, and industrial commodities verticals.

Consumer discretionary services, which accounted for ~8% of overall revenue, are estimated to have grown 35% on-year, largely attributed to revenue more than doubling in sectors such as airline services (on account of rise in passenger traffic and high fares) and hotels (due to increase in occupancy and room tariff). Revenue of IT firms is estimated to have risen 15-17% on-year, aided by rapid adoption of digital platforms across segments and higher spending for modernisation to improve business resilience.

Similarly, consumer discretionary products, which accounted for almost 20% of overall revenue, logged 25% on-year growth, with maximum contribution coming from automobiles sectors due to healthy volume offtake, favourable product mix, and price hikes.

In contrast, the construction-linked vertical, which accounted for 16% of overall revenue, grew only 5% on-year. Steel products, the largest sector in the vertical, de-grew after a continued run-up in revenue growth over the past eight quarters, with a decline of 3% on-year, largely due to correction in flat steel prices to the extent of 15% on-year, and moderate volume growth amid duties levied on exports across finished-steel categories.

For the whole of this fiscal, revenue is expected to grow 12-18% on-year following continued recovery in volume and moderately higher realisations.

Says Hetal Gandhi, Director, CRISIL Research, “Given a relative tapering of growth in the second quarter compared with the first, overall revenue growth for the first half of this fiscal is estimated to be ~25% onyear. Almost 43% of this incremental growth is seen to be contributed by consumer discretionary products and services on a low base of last year as well as price hikes, while metals added another 10% to the incremental revenue.”

On its part, corporate profitability — or earnings before interest, taxes, depreciation and amortisation (Ebitda) margin — contracted ~300 basis points (bps) onyear in the second quarter, marking the fourth consecutive quarter of onyeardecline. The margin contracted sequentially as well, albeit slightly.

Ebitda margins of ~70% of the 47 sectors tracked by CRISIL Research shrunk on-year. The sharpest reduction was in construction-linked sectors, at over than 1,000 bps on-year, largely due to high input costs and delay in passing those on to customers. Among these sectors, Ebitda margin in steel products is likely to have contracted ~1,500 bps on-year due to elevated coking coal prices and lower realisations amid drop in flat steel prices and sales to the lucrative export segment being limited.

Says Sehul Bhatt, Associate Director, CRISIL Research, “Rising revenue momentum is not translating into profit margin proportionately. Although key commodity prices such as coking coal and crude oil have cooled sequentially, they remain elevated on-year, eating into corporate profits, with absolute Ebitda profit remaining flattish during the quarter, both on-year as well sequentially. Sustenance of commodity prices at current levels is crucial to limit further margin contraction.”

In fact, barring consumer discretionary products (which saw marginal increase in margin on-year), consumer staple services, and industrial commodities, margins of all other major verticals contracted on-year. The expansion in margins of consumer discretionary products was largely driven by automobile segment following better utilisation, softening of metal prices, price hikes, and a favourable product mix. Margin expansion in consumer staple services was supported by higher average room rates in the hospital sector, and in the industrial segment by expansion in margins of chemicals, coal, etc.

Absolute Ebitda profit is expected to be steady on-year but drop nearly 4% sequentially.

In terms of post-pandemic recovery in the first half, aggregate revenue is estimated to have reached 146% of the pre-pandemic level (first half of fiscal 2019) and aggregate profit to 155%, though profitability remains a concern.

Says Jignesh Surti, Manager, CRISIL Research, “In absolute terms, of the 47 sectors analysed in the first half of this fiscal, ~94% are estimated to have surpassed the pre-pandemic level in both, revenue and absolute profit. Revenue of key sectors linked to consumer discretionary services and consumer staple services rebounded 155-160%, while absolute profit grew sharply to 4.6 and 2.4 times, respectively.”