Revenue growth in June quarter driven by volumes

Even as pricing power remained elusive

Volumes continued to drive revenue at leading companies in the June quarter, though pricing power remained elusive.

Of 32 large companies (35 if key businesses are considered separately) where the break-up of revenues between volume and realisations is available, the number where realisation grew strongly is a handful.

Nine (including the business division in the case of Grasim, ITC, Idea, Bharti Airtel and Titan) each have seen a realisation gain/fall of two per cent or above. Another 17 largely saw  a flattish trend. Topping the list of realisation gains is Grasim’s VSF (viscose staple fibre) business, which saw a healthy surge in both realisation and volumes. Price hikes and a weaker rupee aided this, while higher capacity utilisation boosted volumes.

Emami and Maruti occupy second and third spots in this list, with realisation gains of 14.6 per cent and 9.3 per cent, respectively. The acquisition of Kesh King’s high-margin product portfolio boosted Emami’s realisations and volumes. On the other hand, lower discounts and an improving product mix in favour of high-margin cars (Baleno, S-Cross, Vitarra Brezza) aided Maruti’s pricing.

Entities in the automobile (Maruti, Eicher, Bajaj Auto), consumer staples (Emami, Colgate, ITC’s cigarette business) and cement (Birla Corporation, Ambuja) sectors have led realisations’ growth. For most automobile companies, improvement in product mix was the key reason. Cement companies showed signs of better pricing power, particularly in the north. Both Birla Corp and Ambuja Cements managed some price increase there and this trend is likely to continue.

“Due to better demand outlook, we expect the north and Gujarat to post stronger realisation growth, aiding normalisation of profitability for Ambuja Cements with peers,” wrote analysts at Motilal Oswal Securities, in a recent report.

ITC has seen sustained pricing power in its cigarette business and has been consistently passing on higher taxes to the end consumer. In the quarter, its cigarettes volume growth was also ahead of expectations, showing the inherent resilience in demand. Continued strong traction in Royal Enfield demand had increased the pricing power of Eicher Motors in the domestic market, while Colgate’s pricing was fuelled by launch of its new herbal toothpaste. On the other hand, the data businesses of telecom companies Bharti Airtel and Idea Cellular, paint companies (Asian Paints, Kansai Nerolac) and tyre makers (Apollo) were laggards and saw a fall in realisations. Benign input costs are the key reason for paint companies. To push their volumes, these have passed on some of the gains from lower input costs to end-consumers which has led to higher volume growth for them.

Apollo Tyres was impacted by price cuts and believes the trend could continue, with higher competition from Chinese imports in particular. For telecom companies, rising competitive intensity from both existing players and new entrants have kept pricing growth in check, both in voice and data businesses.

“Reliance Jio’s entry in the second half of 2016 will likely increase competitive intensity; voice tariff (rate) hikes could be tough, and data usage fall further. Incumbents face the risk of data cannibalising voice, as well as margin pressure with rising competitive intensity. Idea Cellular, with a relatively smaller balance sheet, is at higher risk,” says Vinay Jaising, analyst at Morgan Stanley. As multiple demand catalysts — a good monsoon, higher government pay and pensions, higher solder pensions — play out, companies will be in a better position to raise prices.