Costs will fall in 2023 but remain historically elevated, weighing on some companies’ profit margins
Firms should expect generally robust demand through 2023, especially if their products serve high-income consumers, out-of-home entertainment, or the construction space. With general raw material costs trending down, some companies are likely to turn their focus toward profitability this year. However, moderate-to-high labor costs for service companies and elevated energy costs for manufacturing companies mean not all companies will be in a position to do so. Firms should also account for rising interest rate costs that will weigh on their bottom line through H1 2024.
- Inflation in India has been ticking down in recent months, in line with global trends. Overall consumer price inflation averaged 6.2% YOY in Q1 2023 compared to a 2022 average of 6.7% YOY.
- The downward trend in wholesale prices is particularly notable, averaging 3.3% YOY in Q1 2023 compared to 12% YOY in 2022. However, despite India’s access to discounted crude oil, retail fuel inflation has remained sticky at 10% YOY over the past 15 months (before and through the Russia-Ukraine war).
- These macroeconomic dynamics are also reflected in companies’ financial performance as of Q4 2022. Sales have been robust in India owing to strong post-COVID recovery in demand, and raw material costs have seen a recent downward trend. Service-oriented companies have seen improved profitability in recent quarters, while high energy costs weigh on profitability for manufacturing companies.
Preliminary Q1 2023 corporate results suggest continued robust revenue performance across sectors, particularly those targeted at out-of-home entertainment (e.g., hotels, restaurants, and department stores). Elevated energy costs continued to weigh on the operating profits of iron and steel, edible oils, fertilizers, agrochemicals, and transport companies.
Macroeconomic forecasts indicate that overall revenues will see a slight slowdown in consumer demand over the course of 2023 as the effect of pent-up demand wanes. In this environment, companies selling products oriented toward higher-income consumers are likely to perform better than those oriented to middle-income consumers. Higher interest rates through 2023 will also weigh on business investment behavior and net incomes.
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