CRISIL Research, India's largest independent and integrated research house, estimates that revenues of Indian corporates (excluding financial services and oil companies) grew by 6-7 per cent (y-o-y) in July-September 2013 (Q2 FY14). While overall EBITDA margins are estimated to have remained stable (y-o-y) at 17.8 per cent in Q2 FY14 driven by strong performance of export-driven sectors, over half of the 53 sectors are expected to report a decline in margins.

Mukesh Agarwal, President, CRISIL Research, said, "EBITDA growth is estimated to be sluggish at 6-7 per cent in Q2 FY14. This growth will be largely skewed by export-oriented sectors such as IT services, pharmaceuticals and textiles, supported by the rupee's weakness during the quarter. In Q2 FY14, EBITDA growth of export-oriented sectors is estimated at 25 per cent whereas the remaining sectors are likely to have grown by only 1 per cent due to weak volume growth arising from poor consumer sentiment and the challenging investment climate."

Export-oriented sectors such as IT services, pharmaceuticals and textiles will, in aggregate, report EBITDA margin expansion of nearly 100 bps, while EBITDA margins for other sectors are estimated to have declined by about 50 bps. We believe that margin pressure was the highest in sectors such as capital goods and commercial vehicles, where EBITDA margins are estimated to have fallen by 450-500 bps due to low capacity utilisation and high competition. While sectors such as cement, airlines and paper are expected to report a dip in margins due to high input costs, EBITDA margins in others such as steel, coal and sugar are likely to have fallen due to dip in realisations.

Interest coverage too is under stress. The interest coverage ratio, an indicator for repayment ability, has halved over the last 3 years to 4.5 times in April-June 2013 (Q1 FY14) for the companies considered for our analysis.

Prasad Koparkar, Senior Director, CRISIL Research, said, "In fact, interest coverage ratio in Q1FY14 was the lowest in any particular quarter in the last 10 years. Over one-third of the sectors had a weak interest coverage ratio of less than 2 times in that quarter, driven by sectors such as construction, housing, ports, hotels and retail. Some of the other sectors such as steel, roads & highways and gems and jewellery had modest interest coverage ratio between 2 and 2.5 times, although it has been deteriorating over the past few quarters. We believe that debt servicing ability continued to be under pressure in Q2FY14 due to weak EBITDA growth and ballooning debt levels, in a high interest rate environment."

Margin improvement will be possible only with pick-up in investments and revival in industrial growth, which, we believe, will be challenging in 2013-14. Although the government has announced several reforms in the recent past, the impact has been limited on the ground.