Inventory build-up points to slowdown

The inability of companies to anticipate a slowdown in demand has resulted in a huge pile-up of inventories in their stores and factories.

Analysis of data published by 1,074 manufacturing companies with turnover of at least Rs 1 crore shows they were sitting on unsold finished stock worth Rs 18,950 crore at the end of 2007-08, up almost 70 per cent from Rs 11,164 crore a year ago.

The pile-up can be seen across the board from cement and steel to capital goods, fast-moving consumer goods, petroleum products, sugar and automobiles. The inventories of these firms added up to 15 per cent of their net profit now, up from 11 per cent a year ago.

Companies and experts Business Standard spoke to said, in most sectors, this was the result of a clear recession in demand as prices and interest rates had risen to a level that consumers had deferred purchases. Unlike China, Indian companies thrive on the domestic market and the contraction in demand has showed up in their inventory stocks.

Consumers (companies as well as individuals) cut back on their steel purchases, anticipating an intervention from the central government to rein in spiraling prices "" these went up almost 50 per cent in 2007-08.

Steel companies, as a result, saw their unsold stock rise over three-fold from Rs 716 crore in 2006-07 to Rs 2,565 crore in 2007-08. Major producers like state-owned Steel Authority of India Ltd and Jindal Stainless saw a sharp rise in their inventories. 
 

STOCK SHOCK
(Figures in Rs crore)	Financial year		% of net profit
	2006-07	2007-08	2006-07	2007-08
Inventory (1074 cos)*	11164	18949	10.96	14.89
Inventory (737 cos)+	8777	22209	11.83	24.84
Inventory (337 cos)#	-3260	2387	17.15	-8.61
Sector-wise
Refineries	2145	3526	9.72	11.82
Steel	716	2565	7.08	18.57
Capital goods	458	1281	10.07	22.36
Sugar	804	1655	134.45	971.05
Construction	222	761	26.40	61.37
* Total sample with sales of Rs 1 crore, + companies with rise in finished goods inventory, # companies with decline in inventory (Sugar sector inv % for 2007-08 is higher on account of net loss)

The same reason caused cement inventories to accumulate. Power and construction companies deferred purchases of capital equipment owing to the demand slowdown and the tight monetary situation.

Food product makers revised their prices in the last financial year after the sharp rise in the prices of key inputs like wheat and edible oil. This caused the value of inventories for companies like Hindustan Unilever, Nestle, Marico and Godrej Consumer to go up.

Though it adds to storage costs, inventory shows up differently in firms' profit and loss. Inventory stock is deducted from raw material cost and to that extent shows up in a firms' profits. Conversely, when inventory gets used up, profits fall.