Pricing power still eludes India Inc

Rise in sales growth during March quarter largely led by volumes, though picture varies in and across segments

India Inc’s revenues grew at the fastest clip over the past six quarters in the three months ending March (Q4). This uptick was largely volume-led, as pricing power continued to be weak. Most companies either maintained volume growth at levels seen in recent quarters or saw it inch up a bit in Q4. Of the 33 large companies that have announced results so far and where the break-up of volume and realisation (pricing) growth is available, 16 had a fall in realisation of one to 19 per cent and seven have seen flattish realisation (zero to one per cent). Of the other 10 companies, seven have seen an increase, of one per cent to 16.5 per cent.

Metal companies JSW Steel, Hindalco (Novelis) and Tata Steel (standalone) led the list of those with the highest fall in realisation over the year-before quarter. JSW’s fell 19 per cent, Novelis’ and Tata Steel’s were down 17.9  per cent and 13 per cent. The dip in global metal prices was the key factor. While realisation in the current quarter will be aided by the rise in domestic steel prices, this might not be sustainable in the long run. Abhishek Poddar, analyst at Kotak Institutional Equities, says: “Softening global steel prices and transition of MIP (minimum import price) to safeguard duties (with reducing tariff structures) will continue to exert pressure on domestic prices.”

UltraTech Cement occupied the fourth slot in this table with a 10.4 per cent decline in realisation in the quarter. Peers Ambuja Cement, Birla Corporation, ACC and Grasim  Industries saw theirs’ fall by 7.6 to nine per cent. Fast moving consumer companies (FMCG), paint companies and lubricant makers also saw price deflation for another quarter, largely due to lower prices of inputs. Lower input prices typically leads to heightened competition from small, unorganised players in most sectors. This forces the larger companies to protect their market share by passing on lower input costs to end-users. Also, amid continuing slowdown in consumption demand, companies are investing in brand building, promotions, etc, to protect their volumes.

With input costs firming up, companies could reverse some of the earlier price cuts or promotions. However, the intensity of these rollbacks might not be too high, given the subdued consumption demand. Also, such pricing actions will take place only in the second half of this financial year, estimate analysts, when the base effect comes into play. Realisations of large information technology companies continued to decline in Q4, amid rising competitive intensity and increased growth of digitisation. The deal sizes and tenures in digitisation are lower than the traditional businesses and lead to pricing pressure for IT companies.

Of the 10 companies that saw realisation gains in Q4, four are in the automobile sector — Maruti (realisation up 8.2 per cent), TVS Motor (5.4 per cent), Bajaj Auto (3.1 per cent) and Hero MotoCorp (1.2 per cent). Price increases and improved sales mix in favour of high-margin products fuelled the gains.

Nitesh Sharma, automobile sector analyst at PhillipCapital, says: “Two factors boosted Bajaj Auto’s realisations in the quarter —better currency realisation on exports of 67.5 versus 62-63 levels (rupee to a dollar) and improved product mix with a higher share of the Pulsar. All auto companies hiked prices by 1-1.5 per cent. Car makers did it to pass on higher taxes in the recent Union Budget and two-wheeler companies hiked prices in anticipation of higher raw material prices.” Also, new product launches typically aid overall realisation of auto companies.

Emami and ITC topped the list of those with a sharp improvement in Q4 realisation. Emami’s were boosted by the acquisition of Kesh King, which enjoys higher pricing. High demand inelasticity of cigarettes to prices, on the other hand, enabled ITC to pass on the higher tax burden to end users. This quarter, though, the company's cigarette volumes remained flat and curtailed the falling volumes over the past few quarters. The two telecom companies, Bharti Airtel and Idea Cellular, reported divergent trends in the quarter, with the latter witnessing an uptick in both data and voice realisation on a sequential basis.

However, Idea's decision to withdraw promotional offerings in its voice business in new circles led to lower voice volume growth of 1.2 per cent in Q4 versus five per cent in the December 2015 quarter. Analysts believe the realisation improvement is unsustainable in the wake of likely higher competition after the launch of Reliance Jio. In this backdrop, Airtel's strategy of chasing volumes appears sanguine.

Overall, as demand across markets picks up, led by a good monsoon, implementation of a pay rise for government employees and higher soldier pensions, companies might perform better on both volume and pricing fronts, and post stronger earnings growth.