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CRISIL Q3 FY18 Results

Outlook
January 2018
Industry summary

Results review (July – September 2017)

Revenue growth edges up again

Aggregate topline performance was relatively better at 6.8% in the second quarter of fiscal 2018, after a weak
first quarter. Key commodity-linked sectors such as cement, steel products, aluminum and natural gas registered
a healthy 21% on-year growth in revenue and saved the day. Steel and non-ferrous metals led the commodity-
linked sectors’ performance, benefitting from the rise in prices. Further, the pain in consumption sectors relatively
softened, with all consumption-linked sectors, excluding telecom, registering a growth of 14% on-year.

Telecom continued to see a sharp drop of over 20% in revenue amid pricing pressure. Similarly, export-linked
sectors such as IT and pharma continued to show a subdued growth of close to 3%, although it was better than
the decline in the last quarter on a year-on-year basis.

The analysis is corroborated from the performance of over 450 companies across 50 sectors (excluding financial
services and oil)

Industry revenue, on-year basis

7400 7.2% 8.0%


6.8%
7200 7.0%
6.1%
5.6%
7000 5.2% 6.0%

6800 5.0%
3.8% 3.8%
Rs bn

6600 4.0%

6400 3.0%
2.0%
6200 2.0%

6000 1.0%
0.0%
5800 0.0%
Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

2015-16 2016-17 2017-18

Revenue Growth ( y-o-Y)

Source: CRISIL Research

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A snapshot of key sectors
Revenue Growth Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

Overall 2.0% 0.0% 5.2% 3.8% 3.8% 7.2% 6.1% 5.6% 6.8%

Key Industries 2.9% 0.1% 8.2% 6.2% 6.0% 8.2% 6.3% 5.9% 8.0%

Automobiles 10.6% 12.5% 16.1% 9.6% 11.0% 2.7% 6.8% 4.7% 20.3%

FMCG -2.5% -2.0% 1.3% 5.7% 6.5% 2.4% 5.7% 0.8% 6.6%

IT services 15.3% 13.2% 18.3% 14.0% 8.6% 9.4% 4.8% 2.6% 3.6%

Pharmaceuticals 9.0% 7.0% 15.6% 8.7% 8.2% 10.3% 0.6% -8.3% 0.5%

Power 13.8% -0.8% 12.3% 3.1% 0.6% 6.3% -0.1% 6.4% 3.5%

Steel products -17.2% -20.4% -6.4% -2.3% 7.1% 28.7% 24.5% 23.3% 25.5%

Telecom services 9.2% 7.6% 9.5% 6.7% 6.8% -2.5% -14.0% -15.8% -22.0%

Note: key sectors include airline services, aluminium, automobiles, auto components, capital goods, cement, chemicals,
construction, FMCG, housing, IT services, media & entertainment, natural gas, pharmaceuticals, power, retail, steel products,
sugar, telecom services, cotton yarn and tyres; overall industry covers key sectors and other sectors (automotive castings,
ceramic tiles, chlor alkalies, coal, coffee, distillers and breweries, edible oil, educational services, ferro alloys, fertil isers,
gems and jewellery, hotels, hospitals, ites, material handling, oilfield equipment, paper, ports, power cables and conductors,
power transformers, roads and highway, shipping, steel intermediates, steel pipes, tea, transmission towers and telecom
towers)
Source: CRISIL Research

Key segments that supported revenue growth in the second quarter:

 Steel products: Aggregate revenue increased 25% on-year, because of a sharp increase in realisation and
steady demand. Domestic flat and long steel prices rose 19% and 27% on-year, respectively, in line with
higher global prices amid strong demand in China. Increase in domestic demand by 4.1% on-year, coupled
with a sharp export growth of 56% on-year, supported the top-line growth of domestic steelmakers.
 Sugar: Revenue of North-based sugar mills increased a significant 40% on-year, driven by higher volume of
sugar in Uttar Pradesh due to better yield. On the other hand, revenue of South-based mills remained flat
on-year.
 Automobile: The automobile sector posted a 20% on-year growth, mainly because of a surge in the sales
of cars and utility vehicles (UVs) (22% on-year growth) on the back of new-model launches. Revenue of
domestic commercial vehicle (CV) manufacturers rose 33% on-year, mainly due to an 18% rise in realisation
and a 15% growth in sales volume growth, driven by relatively higher growth in the MHCV segment as well
as the higher priced BS-IV compliant vehicles. Higher sales volume in the quarter was also because of the
postponement of purchases from the first quarter of fiscal 2018, due to apprehensions to buy newer
technology vehicles (BS-III to BS-IV) and lower freight movement before the GST implementation. Two-

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wheelers and tractor manufacturers’ net revenue grew 10% and 14% on-year, respectively, driven by an
increase in sales volume amid lower realisations.
 Natural gas: Aggregate revenue increased 18%, led by a similar increase in regasification and distribution
segments, which were driven by volumes. Distribution volumes grew 14% on-year, because of higher demand
for CNG (compressed natural gas) as well as PNG (piped natural gas). Transmission revenue grew 12% on-
year, because of a 3% increase in transmission tariff and a 9% growth in transmission volume.
 Petrochemicals: Aggregate revenue increased 16% on-year, led by a rise in volume and product prices.
Higher crude oil prices resulted in higher polymer prices during the quarter. The ramp-up of Reliance
Industries’ (RIL) 2.2-MMTPA PX plant at Jamnagar supported volume growth. Thus, RIL’s revenue (accounting
for ~80% of the sample set’s total revenue) increased ~26% on-year.
 Airline services: Aggregate revenue increased 16%, due to a steep growth in passenger traffic. Despite a
marginal rise in fares, total passenger traffic grew 14% on-year during the period.
 Cement: Aggregate revenue grew a healthy 15% on-year, largely driven by a ~12.7% increase in sales volume
and supported by a ~2.2% rise in realisation. Revenue of UltraTech, the largest contributor to the set,
registered 20.2% revenue growth, primarily due to a 17.5% increase in sales volume.

Other key sectors

 Pharma: The sector recorded a tepid revenue growth of 0.5% on-year, due to lukewarm sales growth by
large and mid-sized formulation players. Revenue of large formulation players fell 0.5% on-year, as pricing
pressure in the base business in the United States (US) market continued to impact realisation during the
quarter. However, two para IV launches gave the overall business support, offsetting the impact of price
erosion in the base business.
 Telecom: The sector witnessed a drastic 22% on-year fall in total revenue, due to pressure on realisation
amid the ongoing price war. In addition, with voice getting bundled with data, the industry is losing voice
revenue to data. Further, the cheaper bundled packs offered by Reliance Jio led to a decline in the average
realisation per MB of data from ~22 paise in the second quarter of fiscal 2017 to ~2 paise in the second
quarter of fiscal 2018, leading to industry de-growth.
 IT services: The sector witnessed a moderate growth of 3.6%, mostly due to a stronger rupee. The rupee
gained significantly by ~4% on-year in the corresponding quarter against the dollar, affecting the rupee
revenue of players in general. Billing rates continued to decline in traditional IT services, because of their
increased commoditisation.
 FMCG: The sector recorded a 7% on-year growth in revenue, due to expanding volume, as product prices
were reduced with players passing on the benefits of lower taxes on many FMCG products to customers.
Restocking after the disruption due to GST implementation also helped in growth.

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 Power: The sector’s growth was below the industry average. Revenue of the power generation segment
remained tepid at 1.1% on-year, due to tepid demand. However, the transmission segment witnessed a
robust growth of 16% on-year, because of strong asset capitalisation. Thus, the power sector witnessed a
3.5% on-year rise in revenue in the second quarter of fiscal 2018.
 Aluminium: Aggregate revenue for companies in the sample set rose 9.8% on-year, because of production
growth and improved realisation. Domestic aluminium prices improved 4% on-year, in line with the elevated
London Metal Exchange (LME) prices. Domestic demand for aluminium also witnessed a slight uptick in
September.

Pricing pressure and higher input cost dent EBIDTA margin

A rise in the input cost and pricing pressure dented the overall profitability of Indian industries. EBITDA (earnings
before interest, tax, depreciation and amortisation) margin contracted a little lesser than 100 basis points (bps)
to 19% in the second quarter of fiscal 2018. Pricing pressure led to a fall in realisation across key sectors, such
as telecom, pharma and IT services. The rupee gained a significant ~4% on-year in the corresponding quarter
against the dollar, affecting the rupee revenue of players. While telecom services witnessed pricing pressure due
to intense competition in the domestic market, pharmaceuticals and IT services faced pricing pressure in the
global market.

Several other sectors, such as textiles, tyres, petro chemicals and sugar, witnessed falling margins due to a rise
in input cost. The prices of key inputs – steel and crude oil – rose 23% and 13% on-year, respectively, leading
to a contraction in margins for these sectors. Margins stabilised on a quarter-on-quarter basis. For most key
sectors, except telecom, margins improved, resulting in a better EBIDTA margin on a sequential basis.

However, overall EBIDTA for key sectors showed an increase, as revenue growth revived, with GST woes settling
down and higher commodity prices aiding a recovery.

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Industry’s EBITDA margin

22.0%
21.1%
21.0%
20.3%
19.9% 20.0%
20.0%
19.4%
19.2%
18.9% 19.0%
19.0%

17.9%
18.0%

17.0%

16.0%
Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

2015-16 2016-17 2017-18

Source: CRISIL Research

A snapshot of key sectors

EBITDA margin Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

Overall 19.4% 19.2% 19.9% 21.1% 20.0% 20.3% 17.9% 18.9% 19.0%

Key Industries 19.7% 19.4% 20.8% 21.4% 20.6% 20.6% 18.9% 18.9% 19.6%

Automobiles 13.4% 12.2% 13.7% 12.7% 13.2% 11.9% 11.1% 10.5% 13.7%

FMCG 22.9% 24.0% 23.8% 23.3% 23.6% 24.0% 24.1% 23.4% 24.4%

IT services 25.4% 24.9% 24.9% 23.1% 23.4% 24.6% 23.5% 22.1% 23.2%

Pharmaceuticals 24.8% 23.6% 22.2% 24.4% 24.3% 24.0% 18.3% 17.3% 20.9%

Power 32.5% 35.2% 37.0% 34.4% 34.2% 33.5% 32.4% 34.3% 36.0%

Steel products 9.7% 5.7% 9.5% 16.6% 12.7% 15.5% 15.0% 13.0% 14.8%

Telecom services 35.0% 35.1% 36.4% 35.9% 35.4% 31.4% 29.8% 27.6% 24.0%

Note: Key sectors include airline services, aluminium, automobiles, auto components, capital goods, cement, chemicals,
construction, FMCG, housing, IT services, media and entertainment, natural gas, pharmaceuticals, power, retail, steel
products, sugar, telecom services, cotton yarn and tyres; overall industry covers key sectors and other sectors (automotive
castings, ceramic tiles, chlor alkalies, coal, coffee, distillers and breweries, edible oil, educational services, ferro alloys,
fertilisers, gems and jewellery, hotels, hospitals, ites, material handling, oilfield equipment, paper, ports, power cables a nd
conductors, power transformers, roads and highway, shipping, ste el intermediates, steel pipes, tea, transmission towers and
telecom towers)
Source: CRISIL Research

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The on-year increase in EBITDA margin was driven by:

 Sectors such as airline services (due to a rise in the aggregate passenger load factor), media and
entertainment (lower employee costs and newsprint prices), retail (better operating leverage and input-tax
credit on rentals) and natural gas (lower operating costs). Automobiles and auto components witnessed a
slight expansion in the margin.
 Other than these key segments, a decline in the operating margin was witnessed in sectors such as sugar
(higher raw material cost), cotton yarn (sharply lower cotton yarn prices compared with cotton prices),
telecom services (competitive pricing of Reliance Jio), IT services and pharmaceuticals (rupee appreciation
and pressure on billing rates), and petrochemicals (higher raw feedstock prices).

Poor operating performance continues to impact net margin on-year

Net margin dropped a sharp 200 bps on-year to 7.7%. The decline was much sharper than at the operating level.
Almost 13 of 21 key sectors showed a decline in margins at the net level, compared with 8 out of 21 that showed
a fall in EBIDTA margin.

While construction showed a nearly 700 bps drop in net margin amid stretched balance sheet and restructuring,
pharma companies showed a drop amid write-offs. Most commodity-linked sectors such as cement, tyres and
petrochemicals, continued to show a decline in net margin, in line with operating margin. Pricing pressures
continued to impact the net margin of telecom players amid higher capital spending.

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Industry’s net margin

10.0% 9.7%
9.2%
9.0% 8.7%
8.4%
8.2%
7.9%
8.0% 7.7%
7.2%
7.0%

6.0%

5.0% 4.6%

4.0%
Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

2015-16 2016-17 2017-18

Source: CRISIL Research

A snapshot of key sectors

Net Margins Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

Overall 8.7% 7.9% 8.2% 9.2% 9.7% 8.4% 4.6% 7.2% 7.7%

Key Industries 8.6% 8.2% 8.0% 9.1% 9.9% 8.3% 3.7% 6.9% 8.1%

Automobiles 7.8% 7.1% 7.0% 8.4% 9.1% 6.6% 5.7% 6.6% 8.5%

FMCG 15.4% 16.8% 15.3% 15.8% 16.5% 16.9% 16.8% 15.8% 17.0%

IT services 19.1% 19.0% 18.8% 18.2% 18.3% 18.6% 18.3% 17.5% 18.3%

Pharmaceuticals 16.1% 15.9% 13.4% 16.0% 15.7% 14.6% 10.6% 5.3% 12.6%

Power 10.8% 10.1% 6.9% 9.1% 9.5% 9.0% -3.1% 8.8% 10.4%

Steel products -8.6% -12.0% -7.0% -4.3% -5.7% -3.2% -1.9% -5.1% -1.2%

Telecom services 11.2% 9.3% 7.2% 5.6% 8.3% -1.6% -61.3% -6.7% -13.8%

Source: CRISIL Research

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Performance metrics of major sectors

Revenue growth versus EBITDA margin across key sectors (past four quarters)

40% EBITDA Margin (%)

Indust ry
35% Power

30%
FMCG IT services

25%
Pet rochemicals
Pharmaceut icals
20%

Cement

15% Aluminium

Aut omobiles
10%
Airline services
Const ruct ion

Capit al Goods Revenue Growt h (y- o- y %)


5%

0%
- 5% 0% 5% 10% 15% 20% 25%

Source: CRISIL Research

Note: Data represents aggregate performance of the mentioned sectors for the past four quarters (Q3 FY17 to Q2 FY18);
size of the bubble indicates sector’s share in overall industry’s revenue

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Industry outlook

Revenue outlook

Growth looks up as consumption linked sectors gain momentum, signalling cyclical recovery

CRISIL Research expects corporate revenues – excluding that of banking, financial services and insurance, and
oil companies – to rise ~ 9% on-year in the third quarter ended December 31, 2017. Consumption-linked sectors,
with the exception of telecom services, is expected to grow at a robust 13-14% driven by a demand boost from
the festive season, and owing to the low base effect from demonetisation impact in the same quarter last fiscal
along with the fade-out of GST-related disruptions. Commodity-linked sectors such as steel products and
petrochemicals are expected to continue growing amid firm prices.

On the other hand, growth in telecom, information technology (IT), and pharma sectors may slacken in the
quarter. Appreciation in the rupee and pricing pressures will continue to affect export-linked sectors such as
pharma and IT services. While pricing and regulatory pressures from the US will remain in pharamceuticals, new
product launches will help contain the damage, though this could take a few quarters to play out. Telecom
industry will continue to face pricing pressure, as incumbents slash tariffs to maintain competitive pricing.

Sectoral snapshot
Revenue growth Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3 FY18 E
Key sectors 0.1% 8.2% 6.2% 6.0% 8.2% 6.3% 5.9% 8.0% 8.6%
Automobiles 12.5% 16.1% 9.6% 11.0% 2.7% 6.8% 4.7% 20.3% 15.1%
FMCG -2.0% 1.3% 5.7% 6.5% 2.4% 5.7% 0.8% 6.6% 8.5%
IT services 13.2% 18.3% 14.0% 8.6% 9.4% 4.8% 2.6% 3.6% 3.8%
Pharmaceuticals 7.0% 15.6% 8.7% 8.2% 10.3% 0.6% -8.3% 0.5% -0.4%
Power -0.8% 12.3% 3.1% 0.6% 6.3% -0.1% 6.4% 3.5% 5.1%
Steel products -20.4% -6.4% -2.3% 7.1% 28.7% 24.5% 23.3% 25.5% 20.0%
Telecom services 7.6% 9.5% 6.7% 6.8% -2.5% -14.0% -15.8% -22.0% -21.0%

Source: CRISIL Research

 Steel products: Revenue is projected to increase 19-20% on-year, owing to revival in domestic demand
along with a surge in exports, leading to healthy volume growth. Overall sales volume is expected to grow
8-9% on-year. In July-August 2017, domestic demand is estimated to have risen 4.1% on-year and exports,
50% on-year. Domestic flat and long steel prices are expected to rise 6-8% and 13-15% on-year in the third
quarter, respectively, because of sharp uptick in global steel prices and elevated raw material prices.

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 FMCG: Aggregate revenue is expected to improve 8-9% on-year. Growth will spring from the low base of
the previous year. Further, with tax restructuring for many FMCG products during the 23rd meeting of the
GST Council held on November 10, players are likely to pass on the benefits of reduced taxes to customers.
This will lead to softening of prices, and growth will be led by a rise in volumes. A stable value chain and
improving rural demand will also aid growth.
 IT services: Rupee revenue is projected to rise slower by 3-4% on-year. This is mainly due to the rupee
appreciating nearly 4% on-year, coupled with continuing pressure on billing rates in traditional information
technology services.
 Automobiles: Revenue for the automobile industry is projected to grow at a healthy 14-16% on-year.
Revenue of passenger vehicles is expected to rise 8-10% on-year on the back of traction from GST
implementation, as also due to favourable responses for popular models. Revenue of two-wheeler players is
expected to rise by 15-20% on-year driven by rapid growth in scooters and motor cycles, while mopeds are
expected to witness de-growth. Commercial vehicles revenue is expected to rise ~30% on-year owing to
~19% rise in volumes and ~11% rise in average realisations.
 Power: Revenue for the power sector is expected to grow at a slow 5%, led by the generation segment,
which is expected to rise 3-4% on-year due to a steady rise in generation. The transmission segment, which
accounts for 11% of the sector, will grow 11-13% on-year, because of the high transmission capacity addition
during the past four quarters, leading to higher capitalisation. Distribution revenue is expected to rise 6-8%
on account of on-year increase in power demand as well as tariff revision for Tata Power’s distribution
business in Mumbai.
 Telecom: The industry’s gross revenue is expected to fall by ~21% on-year owing to heightened competitive
intensity. In an effort to retain high data-using subscribers, incumbents are devising new bundled offers and
innovative data plans to counter Reliance Jio, which has led to deteriorating realisations (both data and
voice). Although Jio has started increasing tariffs directly as well as indirectly (by reducing validity for same
pack), its offerings are still competitive compared with the subscription packs offered by incumbents. In
addition, the cut in interconnect usage charges from 14 paisa/min to 6 paisa/min will impact revenue of
incumbents, as they were net gainers from access charges.
 Pharmaceuticals: Aggregate revenue is expected to marginally drop in the third quarter on account of a 1-
3% decline in revenue of large formulation players. Realisation pressure in the base business in regulated
markets, coupled with lower opportunity in the generic space, is expected to hamper revenue growth.
However, this will be partially offset by 9-11% on-year growth in the domestic segment. Revenue for
Glenmark Pharma and Lupin is expected to come under substantial pressure.

10
-30%
-10%
-20%
0%
10%
30%
40%
50%

20%
Sugar

Petrochemicals

Source: CRISIL Research


Natural gas

Steel products

Retail 20%

Airline services

Automobiles
15%

Cement

Aluminium

Tyres

Auto components

FMCG
9%

Cotton yarn

Power
5%
Revenue growth outlook across sectors for the third quarter of fiscal 2018

IT services
4%

Housing

Media & Entertainment

Construction

Capital Goods

Pharmaceuticals

Telecom services
Average growth: 8.6%

-21%

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Other sectors that are expected to drive revenue growth are:

 Airline services: The aggregate revenue of the airlines industry is expected to increase 16-18% on-year in
the third quarter, upon strong growth in passenger traffic, primarily in the domestic sector. Domestic
passenger traffic is expected to increase 16-17% on-year, despite a rise in fares by airlines.
 Chemicals: The aggregate revenue of companies in the petrochemicals segment is slated to rise 25-27% on-
year, owing to improvement in petrochemicals realisations, in turn due to a rise in feedstock naphtha prices
following higher crude oil prices. Stabilisation in production of RIL’s PX plant of 2.2 MMTPA capacity at
Jamnagar will drive the volume growth.
 Cement: Revenue is projected to rise 12-14% on-year, owing to 8-9% increase in sales volume and a healthy
improvement in realisation, led by higher input prices.

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EBITDA margin outlook

Rising input costs squeeze corporate profitability

CRISIL Research believes that revenue growth is not likely to bring enough operating leverage to offset the
impact of rising oil and commodity prices, rupee appreciation, and pricing pressures in several sectors in the
third quarter. Consequently, India Inc will continue to face a contraction in earnings before interest, taxes,
depreciation, and amortisation (EBITDA) margins by 120-150 bps to 19.4% on-year. The rupee’s appreciation
could add to pricing pressure and high input costs, hurting exporters’ earnings, IT services and pharmaceuticals.
Profitability of telcos will continue to drop alarmingly by 638 bps despite higher data traffic, owing to competitive
pricing among players. Higher commodity and raw material prices may take a toll on the margins of consumer
companies, more acutely for those in the sugar and tyres sectors.

Snapshot of key sectors

Ebitda Margins Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3 FY18 E

Key Sectors 19.4% 20.8% 21.4% 20.6% 20.6% 18.9% 18.9% 19.6% 19.4%

Automobiles 12.2% 13.7% 12.7% 13.2% 11.9% 11.1% 10.5% 13.7% 12.4%

FMCG 24.0% 23.8% 23.3% 23.6% 24.0% 24.1% 23.4% 24.4% 24.8%

IT services 24.9% 24.9% 23.1% 23.4% 24.6% 23.5% 22.1% 23.2% 23.9%

Pharmaceuticals 23.6% 22.2% 24.4% 24.3% 24.0% 18.3% 17.3% 20.9% 19.4%

Power 35.2% 37.0% 34.4% 34.2% 33.5% 32.4% 34.3% 36.0% 34.3%

Steel products 5.7% 9.5% 16.6% 12.7% 15.5% 15.0% 13.0% 14.8% 14.9%

Telecom services 35.1% 36.4% 35.9% 35.4% 31.4% 29.8% 27.6% 24.0% 25.0%

Source: CRISIL Research

Change in EBITDA margin outlook in the third quarter of fiscal 2018

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400 Change in bps between Q3FY17 and Q3FY18P

200 80 79 49
0

-200 -63 -65

-400

-600 -459

-800 -638

-1,000

Cement
Aluminium

Housing
Construction

Power

IT services

Steel products

Tyres

Telecom services
FMCG

Auto components

Retail

Petrochemicals

Sugar
Natural gas

Cotton yarn

Automobiles

Capital Goods
Media & Entertainment

Airline services

Pharmaceuticals
Source: CRISIL Research

 Aluminium- EBITDA margin is expected to improve 319 bps on-year, largely on account improved
realisations.
 Power: Margins are expected to expand ~70-90 bps on-year on account of lower fuel costs, led by
decrease in landed cost of domestic coal post GST implementation. However, margin expansion will
be partially restricted as imported coal prices are still at an elevated levels on-year.
 FMCG: EBITDA margin is expected to expand 50-100 bps on-year on account of benign commodity
prices and input tax credit. However, companies are expected to have increased their marketing
activities to offset the sombre mood of customers due to GST, and push consumer promotions
during the festive season to increase sales. This will increase marketing and selling expenses and
restrict further margin expansion.
 Steel products: Sharp rise in domestic iron ore prices is expected to weigh down EBITDA margin by
~60-70 bps on-year. Despite an estimated decline in global iron ore prices on-year, Indian iron ore
miners are expected to raise prices. As a result, domestic iron ore prices are pegged to be ~35%
higher on-year in the third quarter.
 IT services: EBIDTA margin is expected to decline marginally. While revenue from less resource-
intensive digital services is growing, stagnant utilisation and falling realisation from non-digital
services will arrest margin expansion. Also, while the US dollar has depreciated versus the rupee on-
year, the pound has rebounded significantly.

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 Automobile sector: Better capacity utilisation, improved product mix, and higher prices would lead
to margin expansion, with commercial vehicles being top gainers.
 Pharmaceuticals: EBITDA margin is projected to contract 400-500 bps to 18-19% on-year on account
of price erosion in the base business, weaker product profile, increase in research and development
spend by the players, absence of any para IV launches, and continued pricing pressure in regulated
markets.
 Telecom services: EBITDA margin is estimated to contract sharply by ~640 bps as industry revenue
comes under pressure, coupled with flattish operating expenses. The shutdown of RCom's 2G
business will also add to the effect. Further, the launch of new networks on spectrum acquired during
the October 2016 auctions will increase the network operating expenses of operators. However, the
fall in margin will be moderated by a decline in access charges (as expense) for the incumbents.

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research covers 86 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our
large network sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed
income markets. We are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking
industries in the country. We are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance
industries. We pioneered independent equity research in India, and are today the country's largest independent equity
research house. Our defining trait is the ability to convert information and data into expert judgments and forecasts with
complete objectivity. We leverage our deep understanding of the macro-economy and our extensive sector coverage to
provide unique insights on micro-macro and cross-sectoral linkages. Our talent pool comprises economists, sector experts,
company analysts and information management specialists.

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Last updated: April 2016

Disclaimer
CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information
obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or
completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data /
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no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently
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which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL
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