Brokerage firm Motilal Oswal Financial Services Limited (MOFSL) believes the gross margin of its coverage universe, barring financials, may drop to a decadal low and the EBITDA margin may fall to an eight-year low in the current financial year (FY23).
"In FY23, the gross margin of MOFSL Universe (excluding financials) is expected to drop to a decadal low of 29.4 percent and EBITDA margin is likely to plunge to an eight-year low of 14.7 percent," said the brokerage firm.
However, Motilal believes that the recent commodity price correction will drive the margin pick-up sequentially in the second half of FY23 and FY24.
Soaring commodity costs are the prime factor why margins are likely to take a hit in FY23.
The brokerage firm pointed out that global excess liquidity, geopolitical challenges, supply-led disruptions and the depreciating rupee led to extreme volatility in commodity costs and pushed them to multi-year highs.
Companies were not able to pass on the entire cost inflation to consumers due to modest demand during the pandemic and in FY22 and as of the first half of FY23, corporate India continued to face significant gross margin pressure in spite of taking sound cost-efficiency measures and multiple price hikes.
The estimates of Motilal Oswal say in FY23E, 11 of the 33 Nifty50 companies (excluding financials and Tata Motors) would see gross margin contraction of over 200bp.
However, the brokerage firm believes auto and healthcare to cushion this steep margin decline. In FY24E, 27 of the 33 companies under consideration are expected to report gross margin expansion, with 10 companies to witness margin expansion of more than 200bp year-on-year (YoY).
Moreover, 17 of the 34 Nifty50 companies (excluding financials and excluding Tata Motors) would post EBITDA margin contraction in FY23E (with 9 companies to witness margin contraction of over 200bp).
However, most of the Nifty50 companies would see EBITDA margin expansion in FY24E, with eight companies reporting growth of more than 200bp YoY, said the brokerage firm.
The brokerage firm expects the MOFSL universe to post 190bp and 220bp expansions in gross and operating margins to 31.3 percent and 16.9 percent, respectively, in FY24.
"We forecast the following sectors to lead the gross margin recovery in FY24: cement (+430bp), consumer (+250bp), metals (+240bp), Oil & Gas (+150bp), and auto (+130bp)," said Motilal Oswal.
"We project the following sectors to lead the EBITDA margin recovery in FY24: cement (+310bp), Oil & Gas (+230bp), metals (+190bp), and auto (+180bp)."
The brokerage firm highlighted that the gross margin for the MOFSL universe stood at 34.6 percent in FY22, driven by Oil & Gas but dragged by metals, cement, and consumer.
However, the gross margin for the universe (ex-commodities) contracted to 42.4 percent in FY22 from 44.7 percent in FY21.
The brokerage firm added EBITDA margin for its universe expanded to a 15-year high of 18.7 percent in FY21 driven by cost-efficiency measures whereas (ex-commodities), the margin scaled a four-year high of 25.4 percent in FY21.
Motilal said India Inc’s operating profitability has seen a sharp contraction with Q2FY23 and EBITDA margins of the first half of FY23 of MOFSL coverage companies (excluding financials) being down 540bp and 510bp to 12.8 percent and 13.5 percent, respectively in Q2FY23.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.