Lower commodity prices prop up India Inc

Cumulative savings over five-year downcycle may be as high as Rs 15.2 lakh crore

Lower commodity and energy prices translated into cumulative savings for listed companies of up to Rs 15.2 lakh crore ($233 billion) over the past five years. The biggest gains accrued to energy companies ($84 billion), automobile and consumer durables makers ($25 billion) and metal and mining companies ($65 billion). The analysis is based on the quarterly results of 1,924 companies for the past five years.
 
Expenses on raw materials and energy were the equivalent of 46 per cent of net sales of all listed companies during the April-June 2011 quarter. The ratio, which stood at 42.5 per cent in the September 2014 quarter, has seen a visible decline  thereafter and stood at 35 per cent during the September 2017 quarter. The Thomson-Reuters CRB Commodity Index, which tracks spot prices of 19 commodities like crude oil, non-ferrous metals and natural gas, peaked in March 2011 and bottomed out in December 2015. It is now up 15 per cent from the 2015 lows.
 
In rupee terms, the cumulative gains from lower input costs accounted for 40 per cent of cumulative operating profits of corporates during the period. Even if one were to assume average commodity prices of 2014 when oil prices started to decline, earnings were boosted by 22 per cent.

Core operating margins, excluding gains from other income, for all companies outside the financial, energy, metals and technology sectors, are up 250 basis points from the lows of 2014. The biggest gains have been reported by automobile and consumer durables makers, where operating margins expanded from 10 per cent of net sales in 2014 to 14 per cent now.
 
Nearly four-fifths of the gains accrued after September 2014, when crude oil prices began to decline. Analysts said this boosted corporate earnings and provided the basis for the current rally on Dalal Street.
 
“Lower commodity and energy prices have been the main earnings drivers during the current rally. Companies reported a steady improvement in operating margins due to lower input costs despite poor top line growth,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

He added the trend was most pronounced in industries dominated by companies that were end-users of commodities produced by bigger companies.
 
Analysts fear a partial reversal of the gains from commodity prices. “Manufacturers are likely to face margin pressure in forthcoming quarters due to a steady rise in commodity prices over the last few months. The impact will depend on volume growth and the company’s pricing power,” said Dhananjay Sinha, head of research at Emkay Global Financial Services.
 
Most brokerages expect a mild recovery in sales and revenue growth driven by higher government spending and an uptick in global demand. This is likely to boost companies’ ability to absorb higher commodity prices. A steady rise in commodity prices is, however, likely to be inflationary, which could dampen consumer demand.