India Inc is on edge as margin pressure, demand concerns weigh
PremiumA bigger concern is about results of subsequent quarters given the continued rise in commodities and inflation
NEW DELHI : Surging inflation is becoming a headache for companies and consumers alike. Rising input costs are putting a significant drag on companies’ earnings, though some have managed to pass the costs on to consumers.
A Mint analysis of 435 manufacturing companies that have reported their March quarter earnings showed that input costs have risen by around 24% from a year earlier, and a sizeable number of them have managed to pass the elevated costs on to consumers, reporting higher revenues. Some companies are charging consumers more by reducing the weight of packaged goods.
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“The impact of inflation is visible. The number of companies beating estimates in the March quarter earnings season from the Nifty 200 index is higher than those who missed them," said Deepak Jasani, head of retail research at HDFC Securities. “However, a large part of this growth is likely to have been driven by price hikes taken on the back of inflationary pressure."
Sales growth has been good, but profit has grown at a slower pace due to higher raw material costs and interest expenses, he added.
As input costs surged, companies have either raised prices or reduced the weight of packets. April retail inflation surged to an eight-year high of 7.79%, even as the reading has remained above the central bank’s 6% upper tolerance limit for the fourth month in April.
“There has been about 100 basis points impact on margins of companies under our coverage universe and 200 basis points impact on margins of Nifty companies," said Gautam Duggad, head of research at Motilal Oswal Financial Services. The overall results have been in line with expectations, added Duggad, with performance being led by financials.
Analysts said that while companies in some sectors such as chemicals and fertilizers have reported positive earnings surprises and seem to have been able to pass on costs, other sectors such as paints, cement and packaged consumer goods are among the worst hit by the rise in commodity prices and are yet to pass costs on to consumers completely. “Major margin pressure would be visible in Q1 earnings if companies are unable to pass on the input costs, and companies will pass on 40-50% of the impact of commodity price rise to the buyers and the rest take a hit on hopes of cooling-down of price rise in the short term," said Prashanth Tapse, vice-president (research), Mehta Equities Ltd.
Input cost pressure has been unprecedented and hence continues to be visible in contracting gross margins despite aggressive price increases, said Manish Jain, a fund manager at Ambit Asset Management. Jain said recent price increases have been able to mitigate the situation, but the impact shall only be partially visible in the June quarter and fully in the following three months.
A bigger concern is about the results of subsequent quarters given the continued rise in commodities and inflation and its impact on spending by consumers and businesses, Jasani said.
Also, maintaining a balance between growth and profitability is always a tricky thing, especially in these inflationary times, experts said. Companies do not want to lose market share in the quest to maintain margins, Jain said.
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Mehta, too, said companies are cautious in passing on costs and managing to maintain decent revenue growth, as demand is intact in items such as edible oil, where higher costs have been almost fully passed on to buyers.
Duggad said price hikes remain a function of demand, and if demand supports, companies may be able to pass on costs.
It’s not just high prices; rising interest rates may hit demand. Monthly instalments may rise, and loans for customers will become expensive and shrink liquidity in the market and the economy, analysts said.