The other victims of Inflation

Union Steel Minister Beni Prasad Verma may have his own unique views on inflation when he says, “Pulses, flour, rice and vegetables have become expensive. The more the prices, the better it is for farmers. I am happy with this inflation.” But there is always another facet to the story. While everyone is talking about how inflation is burning a deep hole in the pockets of common man, the miseries of India Inc have gone unnoticed. Rising prices of commodities have left them with fewer options in terms of pricing and cost management.

“Overall, inflation has been consistently hurting profitability and margins of Indian companies. The input costs of most industries have risen considerably,” says Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio Ltd.

However, that this is not the scenario with all companies is also true. There are sectors like Tobacco, Hotels and Restaurants, and Fast Moving Consumer Goods (FMCG), where the players have managed to pass on the rising input cost to the end consumers. But for most industries, sheer competition has compelled players to take a hit, squeeze their margins and hold-on to the product prices. For instance, a sample of Q1 for FY, 2013 results of 134 companies (excluding financial companies), show a 15 per cent rise in net sales, but the cumulative operating profit margin of these companies have come down to 13.8 per cent from 16.91 per cent for the same period in the previous financial year – a clear indication of the fact that companies are not being able to transfer the burden of higher input costs to the end consumers. In terms of absolute figures, in the June quarter, operating profit of these companies have gone down by about six per cent year on year (YoY).

This combined with a weak domestic currency, has now started chocking business growth in India. For instance, the Rs 350 billion Indian consumer durable goods industry managed only a six per cent overall growth in 2011 – less than half of what it did in 2010 (13 per cent). It was even less that the eight per cent growth they managed to register the slowdown affected FY 2008-09. Between Q2 FY 2012 and Q2 FY 2013, the average price hike by the industry remained between three and five per cent as compared to a six per cent rise in input costs. Result: squeezed margins and a toppled bottom-line. The situation remained more or less the same in the packaged food industry. A 13.5 per cent hike in sugar price and 3.3 per cent jump in milk forced packaged food companies to either reduce the quantity in their packaging or increase their prices. Not surprisingly, all the top packaged food companies including Pepsi, Coca- Cola, Parle, Britannia and ITC decided to pass on the bulk of this cost to the end consumer. That is how the players in these two industries managed to perform better as compared to other industries, which just could not find it easy to pass it to the consumer.

Rajesh Kothari, Managing Director, AlfAccurate Advisors, comments, “In this sluggish demand scenario, it is difficult to demonstrate pricing power. So, corporates raise prices partially and with a lag.” But with the rise in input costs owing to slowdown, the lag effect is taking a serious toll on the companies' books.

In addition to the cost factor, RBI's tightening measures to control inflation and bad primary market conditions are giving companies a nightmare. All their expansion plans that could have helped them to check their cost per unit produced through economies of scale has gone for a toss, simply because raising capital is a costly affair at present. And the demand scenario is not very good either. This has seriously impacted the investments by corporates, a much required booster for the Indian economy. Result: the CII Business Confidence Index for July-September 2012 has fallen to 51.3 from 55 in Q4 FY 2012, indicating how everyone's hope on corporate India to revive the economic scenario has fallen in the past few moths.

Thus, it is time for the policy makers to take this matter more seriously and come forward with some concrete plan to boost the industrial sector. At the end of the day, this is the particular segment of the economy that can provide them a true and stable base to crawl back to the good old days of high growth. At least, this is something that Indian policy makers must learn from their Chinese counterparts.