India Inc’s top line growth remains robust, but the picture pales on the margin front. While the Reserve Bank of India (RBI) governor Duvvuri Subbarao blamed poor pricing power for this, his stance is a break from the past.
In previous monetary policy reviews, the apex bank had said pricing power remained intact despite a slowing environment and corporate India was able to pass on higher costs to customers.
So what has caused this change of stance?
Corporate honchos say persistent inflation has left no more room for companies on the pricing front. This is beginning to show.
Sample this: The fall in margins in refineries, hospitality, packaging and aviation has been in the region of 300 to 1,000 basis points in the past nine months of the financial year ended March 31.
Sectors such as steel, paper, healthcare and textiles have seen a margin erosion of 160 to over 240 basis points, says data compiled by the Business Standard Research Bureau. Auto ancillaries, on the other hand, have seen margin erosion of over 100 basis points in the past nine months.
Venu Srinivasan, chairman & managing director, TVS Motors, says, “Because inflation has been high, it has been difficult to pass on the rise to the customer. Add to that rupee depreciation, and cost of imports has also been substantial.”
While fast moving consumer goods (FMCG), has bucked the trend thanks to “reasonable pricing power”, according to Adi Godrej, chairman, Godrej Group, the quantum of price increases has not been very substantial: just about five to 10 per cent in the third quarter of the current financial year. But the problem has been clearly acute elsewhere.
In auto, for instance, price rises taken by most companies in the past three months has been in the region of one-two per cent only. This is hardly enough when compared with the pressure felt on the input cost front, which has been in the region of about 10 per cent, say market experts. Companies say there is added pressure on account of surplus capacity too, which is depressing prices. “When there is limited supply you can raise prices. But when there is a surplus, it is difficult for auto companies to have pricing power,” says R C Bhargava, chairman, Maruti Suzuki India.
Consumer durable companies also appear to be grappling with the same issue: Of runaway costs and limited pricing power. Companies admit that steep price hikes will simply scare consumers away who are curtailing their spends in the face of rising inflation. Venugopal Dhoot, chairman & managing director, Videocon Industries says, “Taking up prices in one go will hit demand. That could have an adverse impact on volume growth.”
It is this fear of losing volume growth that is actually limiting pricing power. Amit Burman, vice-chairman, Dabur Ltd, says, “In an inflationary scenario, the last thing you would want is to put pressure on the consumer.”
While headline inflation last month stood at 6.95 per cent, it was marginally up over the previous month, that is, January 2012, when it stood at 6.55 per cent. The rupee has also begun depreciating since February 2012 after appreciating to Rs 48 in January this year from nearly Rs 53 last year.
Against this backdrop, consumer durable companies, for instance, have taken up prices by just about 7-8 per cent ,when it should have been nothing less than 10-15 per cent, say market experts. “It’s a delicate balancing act. If you take up prices, you limit penetration. And if you don’t, margins suffer,” says Sunil Goel, senior vice-president, finance, Samsung India. Rajeev Talwar, group executive director, DLF, says, “ We do not have an escalation clause in our agreement to take up prices. This is affecting us.”
In the past few months, real estate industry experts say that costs have shot up by over 30-40 per cent. Owing to stagnant demand, companies have hardly been able to take up prices. The casualty has been margins.
Industry captains say that in a scenario where GDP growth is slowing, the ability to pass on price hikes is also limited.
“The growth of the economy is coming down. It is down to close to 6 per cent. In that kind of a scenario, the ability of corporates to pass on price hikes is hardly much,” says V Balakrishnan, CFO and board member, Infosys.
R Balarami Reddy, CFO, IVRCL adds, “In my view, it is high interest rates that has affected growth, put companies under margin pressure and affected their ability to handle new projects. If there’s a change in stance, it would help.”