NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News  » Business » How rising costs are taking a toll on India Inc

How rising costs are taking a toll on India Inc

February 14, 2011 10:53 IST

 India Inc finds it tough to manage profit margins with rising input costs and other expenditure.

Aggregate figures for a sample of 43 companies (excluding oil & gas PSUs as well as those in the banking, telecom and software sectors) in the BSE 100 index suggest that operating profit margins (OPMs) were down by 63 basis points (bps) year-on-year in the December quarter and that there appears to be no major causes for concern.

But a deeper analysis suggests that the pain is more than skin deep.

Operating profit is profit before interest, depreciation and tax minus other income. One percentage point equals 100 bps.

If mining and refining companies (like NMDC, Sesa Goa and Reliance Industries) are excluded, the remaining 37 manufacturing companies saw a sharper fall of 284 bps in OPMs.

Their cost of goods sold (raw materials, goods purchased and adjustments on account of a rise or fall in inventories) grew by almost 27 per cent vis-a-vis a nearly 20 per cent rise in net sales.

Input costs accounted for 41.6 per cent of net sales in the December 2010 quarter, versus 39.4 per cent in the year-ago quarter - a rise of 229 bps.

The situation is even worse at the company level. As many as 31 companies have seen OPMs decline on a year-on-year basis, with a 421-bp average fall.

In contrast, BSE 100 companies saw an expansion in Ebitda margins on a year-on-year basis. Ebitda is earnings before interest, tax, depreciation and amortisation.

According to an Emkay Global Financial Services report dated November 24, 2010, the aggregate Ebitda margin of the BSE 100 index (excluding banking and oil & gas firms) expanded by 23 bps, compared with the year-ago quarter.

Net sales grew by 21.4 per cent and adjusted net profit by 30.2 per cent in the same period.

Meanwhile, companies in the auto, capital goods, cement, steel and pharma sectors saw a distinct decline in margins in the December quarter. In auto, for instance, higher metal and rubber prices squeezed margins.

While Ashok Leyland, Hero Honda and Maruti saw margins fall by 395-760 bps, Bajaj Auto was the only exception, with margins only slightly lower by 23 bps at around 20 per cent.

While companies are cutting costs and raising vehicle prices, the pressure on margins is unlikely to ease, at least in the near-term.

Following Maruti Suzuki's results announcement, MD Shinzo Nakanishi said, "We are trying to hold back price rises as much as we can. There is immense pressure on the cost front. We cannot pass on the hike, as there is a fear of hurting demand. We are constantly trying to debottleneck our operations by shifting some models to where it is best suited to produce them."

For Bajaj Auto, though, the situation was much better. S Ravikumar, vice-president, business development, Bajaj Auto, said, "The company passed on to customers only two-thirds of the raw material hike in the quarter, while the rest was balanced from cost-reduction initiatives and volume growth. The company maintained its 20 per cent margins because of better sales of premium products, whose cost of production is much lower."

In the event if raw material prices rising further, the company is likely to consider another price hike, said a source.

Higher commodity prices also impacted India's largest engineering company, L&T, especially in the electrical & electronic product business, where higher copper prices hit margins.

Along with higher prices for steel and other construction material, its OPMs fell by over 150 bps. The company is taking measures to rationalise costs and plans to pass them on.

The situation was no better for steel producers like SAIL and JSW Steel. Since they buy a part of their input requirements, higher prices impacted profitability.

Both iron ore and international coal prices have gone up by 15-20 per cent in the last one year.

SAIL, which imports almost 70 per cent of its coal needs, saw margins drop by a massive 1,023 bps, even as it tries to improve economies of scale by increasing production.

"In the third quarter, we had to buy coking coal at $205 a tonne, compared with $128 in the corresponding quarter the previous year. But we took some steps to negate rising input costs, which helped us keep in check the adverse impact on profits," said a company statement.

JSW Steel, which buys iron ore and coal, saw OPMs fall by 544 bps year-on-year in the December 2010 quarter.

Analysts say the margin outlook for partially integrated (like SAIL and JSW) and non-integrated steel players remains susceptible to harder input prices in the near term.

The cement pack wasn't far behind in terms of margin decline.

While volume growth hasn't been encouraging in recent months, fuel and freight are among the major cost components and grew faster than sales, thereby impacting margins by 450-800 bps on a year-on-year basis.

FMCG and pharma have also felt the heat, but for different reasons. While ITC's margins were up marginally thanks to pricing power in the cigarette business and declining losses in the foods segment, HUL saw margins fall by 294 bps due to higher costs, even as it increased prices.

"Based on the unfolding input-cost scenario, we will hike prices, since cost savings alone are not enough," said Sridhar Ramamurthy, CFO, HUL.

Meanwhile, pharma biggies saw margins fall, but not due to input costs. Sun Pharma, including Israeli subsidiary Taro acquired in the September 2010 quarter, saw 33-35 per cent margins, but Taro earned only 20 per cent.

Hence, to a large extent, the different profiles were responsible for a slip in margins.

For Cipla, too, margins shrunk largely due to the start-up costs of its new Indore plant, which is likely to continue to impact overall margins in the next two to three quarters.

Experts say margin pressures are unlikely to ease soon, as costs rise and any aggressive move to hike prices could impact demand. The rising cost of capital will also crimp overall demand, keeping companies across sectors on their toes.

With inputs fromSwaraj S Baggonkar, Jitendra Kumar Gupta and Viveat Pinto.


Vishal Chhabria in Mumbai