To sustain market share and ensure demand wasn’t hit, firms opted for calibrated increase in prices, despite cost inflation.
Higher volumes, rather than pricing gains, played an important role in boosting sales growth for a majority of Indian firms in the quarter ended June 30. This is reflected in the numbers of a majority of the BSE Sensex companies, for which the relevant data is available.
Interestingly, a look at other key companies, not a part of the Sensex ones, in automobiles, information technology (IT), cement and fast moving consumer goods (FMCG) indicates a similar trend. This comes in an environment of high input-cost
inflation, as well as rising interest rates. Experts believe healthy inherent consumption demand helped India Inc post higher volumes in these turbulent times.(Click her for table)
Additionally, companies want to sustain market share as well. To ensure demand is not impacted, they’ve taken judicious price increases. Aditya Narain, managing director and head of India research, Citigroup, says in a recent report: “For the June quarter, the sales momentum is surprising on the upside (19 per cent for Sensex companies, excluding oil and gas), though margin pressures are sustaining. This suggests it is still a ‘demand over profitability’ trend. Overall profits have also been boosted by a surprising easing in ‘below Ebitda’ costs, suggesting higher interest-rate pressures have not yet begun to bite meaningfully.”
While for now India’s consumption growth story appears on track, the question is if these cost pressures and economic uncertainties (in India and abroad) would lead to lower volume growth and pricing power in the medium term. Experts say volume growth for many segments is moderating and if the trend continues, it could reflect in lower top line growth, too.
Gautam Chhaochharia, executive director and head of India mid-cap research at UBS Securities, says: “This quarter, the trend in volume and pricing gains has been diverse. We expect things to worsen and the pricing power of India Inc to shrink. Only companies with dominant market position and having sticky demand for their products will have pricing power.”
Meanwhile, barring the cement sector, which witnessed muted volume growth, sectors like IT, FMCG and automobiles witnessed moderating volume growth (as compared to the March quarter). The moderation in some consumer companies’ volume growth was a function of lowering advertising spending, as well as price rises taken to protect margins from high input-cost inflation. In automobiles, the high interest rate scenario also impacted demand in the passenger, medium and heavy commercial vehicle segments. Growth across the two-wheeler segment remained strong, however, driven by strong rural demand, reflected in 15-24 per cent volume growth for two-wheeler makers.
For some companies, realisation growth took the lead over volumes. This was in the case of companies with high pricing power like ITC and Maruti, as well as those from the cement sector, wherein the top five-six companies control nearly half the market.
The next six months, however, would be challenging for the cement industry, with the double whammy of muted demand and lower realisations by Rs 15-20 per bag, believe analysts at Motilal Oswal Securities.
Volume growth at India’s largest passenger vehicle producer, Maruti, came in lower as its production was hit by a 10-day strike at the Manesar factory, along with a maintenance shutdown for five days in June. For FMCG giant ITC, its leadership position, coupled with high demand inelasticity in the cigarettes segment (over 80 per cent of total sales revenue), enabled it to pass on most of the input cost inflation to consumers.
IT companies witnessed a mixed trend. Tata Consultancy Services and HCL Tech continued to lead volume growth and even managed to extract marginal gains on pricing.
However, given the slowing in the US and European economies, volume growth and, more so, realisations (pricing) could come under downward pressure in the medium term, believe analysts.
The good news is that input prices, especially of metals and crude oil, eased a bit recently consequent to fears of a global slowdown. If the trend continues, it could provide much needed relief to the FMCG and auto companies, among others struggling to keep margins intact.