JULY 202319the iron and steel sector saw a sequential contraction in revenues by six percent, led primarily by softening in steel prices in recent months, although it still remains almost 50 percent higher than the April 2020 levels.Other sectors that reported a visible increase in revenues from H2 FY2022 levels were IT, automotive and fertilisers. For IT, the growth was led largely by increased levels of digitisation globally, and to some extent by benefits of rupees depreciation vis-à-vis dollar. However, the sustainability of this growth remains to be seen, especially with the recessionary trends brewing in the developed markets of Europe and the US, which are key markets for Indian IT companies. FMCG, on the other hand, reported modest single-digit growth, primarily led by price hikes undertaken to offset the input cost inflation, while volume growth was subdued due to softness in rural demand. The automotive sector witnessed revenue expansion, supported both by demand pick-up, as well as price hikes undertaken to pass on the input-cost inflation. Hotels and airlines also continued to report positive growth trends, reflected in improving occupancies as well as pricing, as the concerns related to the pandemic steadily abated. While some of the infrastructure and construction-oriented sectors reported sequential contraction in revenues in the current fiscal, the same is largely due to seasonality, with construction activity slowing down in the monsoon seasons. The Government's focus on construction and infrastructure investments has been one of the supportive pillars of growth over the recent quarters, and this trend is expected to sustain over the near to medium term, and thus aid allied sectors such as cement and steel as well.Companies have been, however, unable to realise the benefits of the improved demand in their earnings performance, with the operating profit margin (OPM)of Corporate India in H1 FY2023 contracting on both YoY (by 410 bps) as well as sequential (by 277 bps) basis. The OPM of 15.9 percent reported in Q2 FY2023 was in fact, at more than 20-quarter lows, with multiple headwinds impacting the earnings of India Inc. Demand revival, post the pandemic, led to a sharp rally in prices of most commodities, especially metals, to multi-year highs, exerting pressure on India Inc.'s margins. Prices of other commodities have also moved up over the past five-six quarters, thus impacting the margins as companies are unable to fully pass on the same to the customers. While these have seen some softening over the recent months, they remain at elevated levels, especially vis-a-vis the pre-pandemic levels. In addition, several sectors have also faced softening in rural demand, which impacted revenues and margins to an extent. Price hikes taken by most entities and stabilisation in input costs in recent months may help arrest a further slide in the margins of Corporate India going forward.The interest coverage ratio of ICRA's sample, adjusted for sectors with relatively low debt levels (IT, FMCG and pharmaceuticals) witnessed a YoY and sequential weakening in H1 FY2023 to 4.7 times, led primarily by the moderation in earnings and an increase in interest costs due to hikes in repo rates as well as increased reliance on external borrowings by Corporate India in the light of suppressed earnings, and these trends are likely to continue over the near term. Overall, the working capital intensity has increased across many sectors, on account of the higher raw material prices, and the requirement to store higher inventory to mitigate supply chain uncertainties.ICRA believes that the H2 FY2023 performance of India Inc. would face similar constraints as supply chain issues are easing only gradually, while commodity-led headwinds continue, especially in the wake of the elevated crude oil prices, depreciation of the rupees vis-à-vis dollar and the geo-political developments. The appreciation of the rupees vis-à-vis the euro and the GBP has also impacted companies with exports in these currencies. Furthermore, the demand recovery in rural markets, which has been relatively subdued in the current fiscal, remains critical. The combined impact of these multiple factors on the credit metrics of India Inc. remains to be seen. The weakening of the overall performance would be especially visible in sectors which have limited ability to pass on the inflationary pressures through price hikes to end customers. Fear of global recession also remains an evolving risk for export-focused sectors such as IT, automotive and textiles. The ongoing geo-political developments as well as the changes in Monetary Policy, including the firming up of interest rates, and their impact on the demand environment and costs, are potential headwinds, and remain key monitorables for the credit profile of Corporate India. For IT, the growth was led largely by increased levels of digitisation globally, and to some extent by benefits of rupees depreciation vis-à-vis dollar
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