Even as commodities prices have fallen sharply in the current financial year, most Indian manufacturing companies’ margins are not expected to go up in the near future, thanks to a host of issues, including a sharp fall in the rupee and lower demand from the infrastructure and construction sector.
Prices of metals are down between 10 and 18 per cent, while that of commodities like rubber fell sharply. However, the falling rupee has made the situation lose-lose for producers as well as consumers. The rupee fell over nine per cent in the first quarter of the current financial year.
Sectors like steel, where some cost escalation had been passed on to consumers in the first quarter of 2012-13, is set to gain. Oil marketing companies, too, would benefit as crude oil prices have seen sharp drop and petrol prices have been hiked.
Prices of all metals are benchmarked against the prices prevalent in the London Metal Exchange (LME). In terms of landed cost of the metals, prices have not fallen in India and hence, consumers of metals were not benefited due to the fall in prices globally.
Biren Vakil, director, Paradigm Commodities, a risk advisory firm, says: “Falling rupee has made the situation lose-lose for producers and consumers of metals, as consumers are not getting advantage of the global trend of falling prices, while producers are not in a position to pass on the cost of production.”
For most of the manufacturing companies, the fall in the rupee, high cost of funds and lower demand from the infrastructure and construction sector will maintain pressure on their margins.
Hindalco Industries Ltd, a major metal producer, is likely to see margins hit in the first quarter. Anubhav Gupta, an analyst with Kim Eng, said: “Hindalco Industries’ quarterly earnings will suffer mainly because of a 10% fall in April-June aluminum prices. Increased interest cost following a 50% rise in borrowings will further weigh on profit.”
India is self-sufficient in aluminium, but still, the commodity’s prices are benchmarked against LME prices. Copper prices have also fallen, but copper returns are in the form of refining and treatment charges paid to smelters like Hindalco, and they are determined on half yearly basis.
Kamlesh Kotak, head, equity research, Asian Market Securities, said: “While most commodity prices have moderated in the first quarter, the positive impact on margins may not be seen as several companies have to provide for fall in currency values for their overseas borrowings, impact on top line may also get impacted due to slower demand. Slowing auto numbers and fall in cement prices will also affect margins.”
Prices of iron ore and coking coal, basic raw material for steel, have softened from April so far. Iron ore prices in international market have fallen by seven per cent from $150 per tonne to $ 139 currently, while coking coal is cheaper by over 20 per cent from $285 per tonne to $225.
“Integrated steel makers like Tata Steel, JSW Steel and SAIL will benefit directly from falling raw material prices and their Ebitda (earnings before interest, taxes, depreciation, and amortisation) will expand while non integrated steel players will have to concede slightly more for imported coal and hence their benefits will be restricted,” said Deven Choksey, managing director of K R Choksey Shares and Securities.
“Steel companies did raise prices in last quarter which will help them improve margins in first one or two quarters by 100-200 bases points but as the raw material prices are falling they will have to eventually pass on price benefits by cutting prices,” said Choksey added.
However, steel companies’ will not be spared from lower demand impacting their top line. For example SAIL has cut prices of steel sheet used in automobile as demand was falling and this could become trend in months to come.
Another beneficiary sector will be oil marketing companies. “OMCs will certainly gain because of dual impact of fall in crude oil prices and petrol price increase,” said Kamlesh Kotak, Head - Equity Research, Asian Market Securities.
Tyre companies have off late not passed on full benefits of falling rubber prices which should positively affect their margins.