The West Asia conflict has inflicted a steeper raw material cost shock on Indian companies than the Russia-Ukraine war, eroding profitability across the board.

Raw materials in the April-June quarter of FY27 accounted for a larger share of both expenditure and sales than they did at the peak of the crude oil crisis in 2022 triggered by Russia's invasion of Ukraine, squeezing India Inc’s operating and net profit margins to three-year lows.

A Mint analysis of standalone earnings of 642 non-banking, financial services and insurance (non-BFSI) companies shows raw material cost accounted for almost 45% of net sales and about 50% of total expenditure during the quarter. In other words, manufacturers spent nearly ₹45 out of every ₹100 earned on raw materials, while almost half of every rupee of expenditure went towards procuring inputs.

By contrast, in Q1 FY23, when companies first faced a spike in global commodity prices due to the Russia-Ukraine war, raw materials accounted for 42% of net sales and 47% of total expenditure. The latest data suggests crude-linked input costs are exerting a bigger drag on non-financial companies than they did three years ago.

As a result, aggregate net profit fell nearly 9% year-on-year in Q1 FY27, marking the weakest performance in almost two years. Operating margins contracted about 450 basis points from a year ago to 15.3%, while net profit margins declined almost 300 basis points to 8.4%, both at their lowest levels since FY23.

Worse already

The weakening trend is also visible at the index level, with the Nifty 500's net profit margin shrinking to 9.8% from 11.3% a year earlier, even as sales grew 21% in Q1, noted Abhishek Mishra, founding partner at SKG Investments and Advisory, a category-III AIF.

This 153-basis-point contraction already exceeds the latest forecast of a 100 bps margin hit for FY27, based on the current situation in West Asia, said Mishra. By comparison, the Russia-Ukraine commodity shock compressed all-listed companies' operating margins by about 100 basis points over the first nine months of FY23, he said. One basis point is one-hundredth of a percentage point.

"So on a pure bps-of-compression basis, the current shock has already done comparable or worse near-term damage in a single quarter than the 2022 episode did over three," he added.

More pain ahead?

The US-Iran war, which erupted in late February, has disrupted West Asian oil and gas supplies, pushing up raw material prices by nearly 45% year-on-year and 20% sequentially in the June quarter. As a result, total expenditure is up almost 30% over the previous year, the analysis showed.

Yet, the full impact on margins may only become visible from Q2 onwards, said Varun N. Joshi, smallcase manager and founder at Nirivantes Research, an investment research firm. According to him, many companies entered the June quarter with lower-cost inventory accumulated before the recent commodity spike, temporarily cushioning profitability.

As inventories are replenished and supplier contracts repriced, margin pressure is likely to intensify in Q2 and Q3, particularly for chemicals, paints, auto ancillaries and packaging companies, Joshi cautioned. “That said, I don't expect a hit like FY23, since (India Inc’s) sourcing and balance sheet improvements are real,” he added.

A silver lining

A part of that resilience also stems from companies being structurally less exposed to energy costs, the analysis showed. Power costs accounted for 4% of sales, down from nearly 6% during the Russia-Ukraine crisis. They also made up just 5% of total expenditure, compared with almost 7% three years ago, despite power expenses rising nearly 15% year-on-year and about 20% sequentially in the June quarter.

The trend suggests investments in captive renewable capacity, waste-heat recovery systems and long-term power purchase agreements have lowered energy intensity across manufacturers, helping absorb part of the commodity shock, said Joshi.

Mishra of SKG Investments added that India's captive power generation capacity is expected to rise at an annual rate of about 8.5% through 2030, reflecting sustained investment in energy self-sufficiency to reduce exposure to volatile grid tariffs. "This is a durable competitive advantage, but its impact will be sector-concentrated, not economy wide," he added.

Balance sheets have provided another buffer. Companies emerged from the FY23 earnings squeeze with lower debt, stronger cash buffers and better interest coverage, making the current cost cycle more manageable than the last commodity shock, Joshi said.

What’s next?

Going ahead, experts expect crude prices to moderate to the upper end of $70 per barrel through the rest of FY27, but said any relief in margins is likely to be gradual rather than immediate.

The pace of recovery will depend on companies' ability to pass on higher costs in import-dependent sectors such as paints, tyres, specialty chemicals and oil marketing, while lower crude prices will take one to two quarters to filter through as high-cost inventories are depleted, said Mishra.

"Calling FY27 merely ‘margin constrained’ risks underestimating how much earnings quality has deteriorated even as topline optics look strong,” he added. “The demand engine is real, but profitability conversion is currently broken across a meaningful share of the index.”

The West Asia conflict has inflicted a steeper raw material cost shock on Indian companies than the Russia-Ukraine war, eroding profitability across the board.

Raw materials in the April-June quarter of FY27 accounted for a larger share of both expenditure and sales than they did at the peak of the crude oil crisis in 2022 triggered by Russia's invasion of Ukraine, squeezing India Inc’s operating and net profit margins to three-year lows.

A Mint analysis of standalone earnings of 642 non-banking, financial services and insurance (non-BFSI) companies shows raw material cost accounted for almost 45% of net sales and about 50% of total expenditure during the quarter. In other words, manufacturers spent nearly ₹45 out of every ₹100 earned on raw materials, while almost half of every rupee of expenditure went towards procuring inputs.

By contrast, in Q1 FY23, when companies first faced a spike in global commodity prices due to the Russia-Ukraine war, raw materials accounted for 42% of net sales and 47% of total expenditure. The latest data suggests crude-linked input costs are exerting a bigger drag on non-financial companies than they did three years ago.

As a result, aggregate net profit fell nearly 9% year-on-year in Q1 FY27, marking the weakest performance in almost two years. Operating margins contracted about 450 basis points from a year ago to 15.3%, while net profit margins declined almost 300 basis points to 8.4%, both at their lowest levels since FY23.

Worse already

The weakening trend is also visible at the index level, with the Nifty 500's net profit margin shrinking to 9.8% from 11.3% a year earlier, even as sales grew 21% in Q1, noted Abhishek Mishra, founding partner at SKG Investments and Advisory, a category-III AIF.

This 153-basis-point contraction already exceeds the latest forecast of a 100 bps margin hit for FY27, based on the current situation in West Asia, said Mishra. By comparison, the Russia-Ukraine commodity shock compressed all-listed companies' operating margins by about 100 basis points over the first nine months of FY23, he said. One basis point is one-hundredth of a percentage point.

"So on a pure bps-of-compression basis, the current shock has already done comparable or worse near-term damage in a single quarter than the 2022 episode did over three," he added.

More pain ahead?

The US-Iran war, which erupted in late February, has disrupted West Asian oil and gas supplies, pushing up raw material prices by nearly 45% year-on-year and 20% sequentially in the June quarter. As a result, total expenditure is up almost 30% over the previous year, the analysis showed.

Yet, the full impact on margins may only become visible from Q2 onwards, said Varun N. Joshi, smallcase manager and founder at Nirivantes Research, an investment research firm. According to him, many companies entered the June quarter with lower-cost inventory accumulated before the recent commodity spike, temporarily cushioning profitability.

As inventories are replenished and supplier contracts repriced, margin pressure is likely to intensify in Q2 and Q3, particularly for chemicals, paints, auto ancillaries and packaging companies, Joshi cautioned. “That said, I don't expect a hit like FY23, since (India Inc’s) sourcing and balance sheet improvements are real,” he added.

A silver lining

A part of that resilience also stems from companies being structurally less exposed to energy costs, the analysis showed. Power costs accounted for 4% of sales, down from nearly 6% during the Russia-Ukraine crisis. They also made up just 5% of total expenditure, compared with almost 7% three years ago, despite power expenses rising nearly 15% year-on-year and about 20% sequentially in the June quarter.

The trend suggests investments in captive renewable capacity, waste-heat recovery systems and long-term power purchase agreements have lowered energy intensity across manufacturers, helping absorb part of the commodity shock, said Joshi.

Mishra of SKG Investments added that India's captive power generation capacity is expected to rise at an annual rate of about 8.5% through 2030, reflecting sustained investment in energy self-sufficiency to reduce exposure to volatile grid tariffs. "This is a durable competitive advantage, but its impact will be sector-concentrated, not economy wide," he added.

Balance sheets have provided another buffer. Companies emerged from the FY23 earnings squeeze with lower debt, stronger cash buffers and better interest coverage, making the current cost cycle more manageable than the last commodity shock, Joshi said.

What’s next?

Going ahead, experts expect crude prices to moderate to the upper end of $70 per barrel through the rest of FY27, but said any relief in margins is likely to be gradual rather than immediate.

The pace of recovery will depend on companies' ability to pass on higher costs in import-dependent sectors such as paints, tyres, specialty chemicals and oil marketing, while lower crude prices will take one to two quarters to filter through as high-cost inventories are depleted, said Mishra.

"Calling FY27 merely ‘margin constrained’ risks underestimating how much earnings quality has deteriorated even as topline optics look strong,” he added. “The demand engine is real, but profitability conversion is currently broken across a meaningful share of the index.”