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Higher metal prices to erode India Inc's margins

Metal prices are up nearly 22% on average during the year so far, pushing up manufacturing costs for Indian companies

Krishna Kant  |  Mumbai & Delhi 

Metals price to rise in 2017: World bank

The recent rise in in the international market could deal a double whammy to corporate India, which is struggling with poor volumes and revenue growth after and the economic disruption caused by the roll-out of the goods and services tax in July.

are up nearly 22 per cent on average during the year so far, pushing up costs for Indian companies. The raw materials cost as a proportion of net sales is up around 50 basis points in the last two quarters and 230 basis points above the lows of the March 2015 quarter.

The combined revenue of domestic manufacturers was up only 3.3 per cent, year on year, during the 12 months ended June, growing at its slowest pace in nearly a decade.

This is exerting pressure on margins, with core operating margins, excluding gains from other income, declining 90 basis points in the last two quarters.

The sample excludes banks and companies from the energy, and software industries. Trailing 12-month data has been used to smoothen out quarterly volatility.

Analysts fear the rise in input costs and poor volume growth have weakened companies’ ability to pass on higher costs to consumers. Moreover, higher metal costs could erode India's export competitiveness. It is difficult to quantify the impact on margins as this will depend on individual companies’ price contracts with suppliers and their ability to pass on the hike to customers.

"We expect a moderation in the margins of companies. It will be most manifest in metal-intensive sectors such as automobiles, capital goods and consumer durables. The fear is that this time the pain could potentially be greater than what companies faced when spiked in 2009 and 2010. Demand growth is much weaker now, making it tougher for companies to hike prices," said Dhananjay Sinha, head of research,

Historically, there has been a close link between corporate margins and international commodity prices, although with a lag of a few quarters because companies usually have raw material inventory contracted at earlier prices. For example, manufacturers saw a steady erosion in their core as spiked in 2009 and 2010 in the wake of the 2008

The companies recouped some of the declines as began to fall after scaling a new high in early 2011. Things have come a full circle and margins are once again under pressure.

Analysts are now betting on higher government spending in the second half of the current fiscal year to turn the tide. "We expect a recovery in demand growth beginning in the third quarter of 2017-18, which will aid margins through a mix of better power and gains from higher volumes," said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Consumer durable companies said the rise in had forced them to consider price hikes. While immediate price hikes are not likely during festive season sales, a price increase of 2-4 per cent will kick in soon after that. "Generally, we look at our (raw material) requirement every quarter. Given rising commodity prices, there is an impact on (product) price, which will start reflecting in 30-60 days. Home appliance prices will go up by 3-4 per cent," said Kamal Nandi, business head and executive vice-president, Godrej Appliances.

such as steel, and are used in refrigerators, washing machines, air-conditioners and microwave ovens. Margins were likely to be affected by at least 20-30 basis points due to increases in metal prices, company executives said.

Companies are also working on reducing costs to soften the effect of raw material prices. In general, most have moved up since the second quarter of 2016-17. The effect is already visible in the financial performance in the third quarter of 2016-17 and the first quarter of 2017-18. “We have to keep a watch on how things move from here. At the same time, we will continue to work on our cost-reduction initiatives to offset the impact of firm commodity prices,” said Ajay Seth, chief financial officer,

Capital goods makers are facing a squeeze on margins due to rising “Margins are under pressure in the domestic market at current metal prices," said MS Unnikrishnan, chief executive officer and managing director for Thermax.

Analysts said the impact would be most visible in the December quarter, as orders in the September quarter would have already been contracted for. The impact for capital goods companies will be limited to transit orders as future contracts will pass through the increase in final

"The impact will be significant. Given the weak demand situation, any cost pressure will be difficult for capital goods companies. The rise in input costs has already shown up for some companies in the June quarter, more is likely to be seen in the September and December quarters," said Sanjeev Zarbade, an analyst with Kotak Securities.

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(With inputs from Amritha Pillay, Viveat Pinto and Ajay Modi)

First Published: Fri, September 15 2017. 01:45 IST
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