Indian companies faced a sharper drop in profit margins during the April-June quarter compared to the Russia-Ukraine conflict period. Rising raw material costs, which now account for nearly half of total business expenses, drove a 9% decline in net profits for major firms. Investors should watch how companies handle these costs as low-cost inventory is depleted.
Indian businesses are grappling with a significant profitability challenge as the ongoing West Asia conflict creates a more intense raw material cost shock than the disruptions seen during the Russia-Ukraine war in 2022. Financial results for the April-June quarter of the current fiscal year reveal that raw material costs have become a heavier burden on corporate earnings, consuming nearly 45% of net sales and 50% of total expenses for a broad sample of 642 non-financial firms.
This trend marks a notable shift in the corporate landscape. During the first quarter of fiscal year 2023, the commodity price surge tied to the Russia-Ukraine war drove these costs to 42% of sales and 47% of expenditure. The current situation has proven faster and more impactful, with operating margins for these companies contracting by 450 basis points to 15.3%. Net profit margins have also retreated, falling by 300 basis points to 8.4%, hitting their lowest levels in three years.
The impact is clearly visible even in the broader market indices. For the Nifty 500, net profit margins dropped to 9.8% from 11.3% a year earlier. This decline occurred despite a 21% growth in sales, indicating that while demand remains present, the cost of doing business is rising much faster than companies can manage. This compression in margins by 153 basis points has outpaced initial expectations, which had projected a more moderate 100-basis-point impact.
Sectors that rely heavily on imports or are sensitive to commodity price swings—such as chemicals, paints, auto ancillaries, and packaging—are facing the most immediate pressure. These industries often have limited control over input prices and face difficulties passing on the full burden to customers without risking demand. While some companies have successfully raised prices to protect their bottom line, doing so carries the risk of cooling off discretionary consumer spending.
Despite these challenges, India Inc. enters this period with a distinct advantage compared to previous cycles. Many companies have spent the last few years deleveraging, resulting in stronger balance sheets with lower debt and healthier cash reserves. Additionally, investments in captive renewable energy and manufacturing efficiency have reduced the energy intensity of production, meaning power costs now take up a smaller share of sales than they did in 2022. These factors provide a necessary buffer against the current cyclical shock.
The critical monitorable for investors in the coming months will be the depletion of inventory. Many firms reported better-than-feared margins in the June quarter largely because they were still using lower-cost materials purchased before the recent price surge. As these inventories are exhausted and companies are forced to source raw materials at current, higher market prices, the pressure on profit margins is likely to intensify. The recovery path for these companies will depend on whether they can improve operational efficiency or if they have the pricing power to pass on the higher costs to their customers without sacrificing sales volume.