The last quarter for FY22 was a mixed bag for many industries - demand for products and services grew as the economy started to normalise, but inflation shot up. Commodity prices soared due to geopolitical tensions and supply chain constraints. This led to lower profitability due to rising margin pressure. Here we take a look at industries that saw a hit in their operating margins in Q4FY22.

Rising input costs offset high revenue growth for commodity chemical firms

The commodity chemicals industry saw one of the biggest falls in operating margins on average in Q4FY22, at 11.3 percentage points YoY across the industry to 15.8%. Out of eight companies that saw their margins shrink, four saw their margins fall by more than 500 bps YoY, two by more than 10 percentage points, and one by more than 30 points.

In Q4FY22, many commodity industry firms saw their revenues grow on the back of higher sales volumes due to rising demand. However, accompanying the demand growth was  a sharp increase in raw material and energy prices caused by the Russia-Ukraine conflict and supply chain disruptions. Overall, higher raw material and fuel costs, non-availability of key raw materials and logistic challenges impacted the operating margins of companies within the industry. 

Deepak Nitrite’s Q4FY22 revenue rose 28% YoY to Rs 1,872.3 crore and profit fell 7.9% YoY to Rs 267.2 crore. But operating profit margin fell 9.1 percentage points YoY to 21.9% as the prices of key raw materials rose sharply. The company’s key raw materials are benzene, propylene, and ethylene which are derivatives of crude oil. The management expects demand to remain strong throughout FY23, but high energy prices could dampen demand.

Similarly, Navin Fluorine International’s Q4FY22 revenue rose 21.5% YoY to Rs 398.4 crore but profit rose only 0.5% YoY to Rs 78.8 crore. This is because operating margin fell by 199 bps YoY to 23% due to higher raw material and employee costs. Prices of raw materials such as fluorspar, chloroform, and sulphur increased due to supply constraints. Going forward the company plans to bag more long-term contracts and increase sales in high margin business segments to offset high input costs and maintain its margins. 

Thirumalai Chemicals also saw its Q4FY22 revenue rise 50.7% YoY to Rs 582.8 crore and profit by only 6.4% to Rs 90.1 crore. This was because operating margins fell by 6.5 percentage points to 23.7% as the company also faced rising  raw materials and employee costs during Q4FY22.

The companies expect demand to remain robust as the economy is recovering. If raw material (like orthoxylene and benzene) and energy prices remain high, it might hurt demand. However reports suggest, the cost of raw materials may normalise, with a pickup in demand by H2FY23. 

Soaring coking coal prices dampen the recovery of the iron & steel industry

Overall, the iron & steel industry’s operating margin on average fell 9.3 percentage points YoY to 15.8% in Q4FY22. Out of the 19 companies that saw their margins decline, nine companies saw margins contract by more than 500 bps YoY, five by more than 10 percentage points YoY, and two by more than 20 points.

Steel makers saw a rise in revenue growth YoY due to surge in demand, but a massive supply shortage in commodities like coking coal and iron ore pushed their prices to record highs. This led to a massive surge in input costs, which increased margin pressure on steel makers. 

JSW Steel’s Q4FY22 revenue rose 74.1% YoY to Rs 46,895 crore but profit fell 23% YoY to Rs 3,234 crore. Its operating margins fell by 11.7 percentage points YoY to 19.6% due to high coking coal and energy costs, and supply chain disruptions. The management plans to enhance its mining capacities at its captive mines to mitigate rising raw material costs. It expects raw material prices to remain high going forward.  

Tata Steel’s Q4FY22 revenue rose 38.7% YoY to Rs 69,323.5 crore and profit rose 46.8% YoY to Rs 9,756.2 crore. However, its operating margin fell by 6.7 percentage points YoY to 21.7% due to a rise in raw material, energy and employee costs. Higher realisations in Europe helped limit the impact of high input costs. The management expects raw material prices to remain elevated in FY23. It plans to offset them by diversifying its sourcing, engaging in reverse auctioning, and hiking prices.

Jindal Steel & Power Q4FY22 revenue rose 20.7% YoY to Rs 14,339.5 crore and profit rose 12.1% YoY to Rs 2,207 crore but its operating margin plunged by 23.1 percentage points YoY to 21.4%. Lower dispatches from captive coal mines, higher raw material and fuel costs hurt its margins. The company expects sourcing coal from its captive coal mines in Australia and Mozambique to reduce the impact of high coking coal costs on its margins in FY23.

Although SAIL’s Q4FY22 revenue rose by 32.1% YoY to Rs 30,758.8 crore, its profit fell 28.6% YoY to Rs 2,478.8 crore on rising input costs. Operating margin was down 12.3 percentage points YoY to 14.1% mainly due to a sharp rise in coking coal prices. The company expects 12-15% rise in consumption cost of coking coal in Q1FY23 and plans to implement cost cutting measures to offset them in FY23. These measures include diversifying sourcing, blending coal, and using pellets to reduce costs.

Traditionally, the fourth quarter is the strongest in terms of demand, sales volume and profitability for steel companies. This time though, the quarter started off sluggish with steel prices falling in January and remained weak till February. Demand picked up in March but is now impacted by global uncertainties. The steel companies expect high raw material prices to persist for the industry during FY23, but they also expect a surge in demand.