Mumbai: Profitability of Indian manufacturing companies rose to the highest level in a year as global commodity prices plunged and demand in Asia’s third largest economy held steady.

The ability of some firms to retain the benefits of lower input costs, rather than pass them on to the consumer in the form of price cuts to help stoke consumption, also reflects a mild improvement in pricing power.

Operating profit margin, the difference between revenue and expenses, climbed to 14.67%, the highest since the quarter ended June 2014 and the second highest since at least March 2012, according to a Mint analysis of 142 manufacturing companies that are part of the BSE 500 index and have reported their June quarter earnings.

“I think it is largely due to a decline in commodity prices. Most global commodities have been on a declining trend," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd. “Also, one advantage was that some companies managed to not pass on the entire benefits from such a fall in commodity prices, which helped boost operating profit margins further."

Concerns over weaker growth in China, which consumes about half of the global iron ore, copper and coal supply, and expectations of a US interest rate hike later this year have led to a rout in commodity prices, pushing the Bloomberg commodities index to a six-year low. The drop in metal and coal prices has benefited power producers, consumer durable companies and automobile makers, among others.

London Metal Exchange (LME) copper prices fell 5.11% in the quarter ended 30 June—the fourth consecutive quarterly decline. Aluminium prices fell 7.31%, while steel prices also dropped in the domestic market because of pressure from cheaper imports. In the January-March quarter, crude oil prices fell 7.6% and some of the benefit of this also continues to flow in for companies that may have locked in lower prices of oil and oil-linked inputs. Coal prices have also fallen to near decade lows in the global markets, Reuters reported on 4 August.

For power firms, the operating profit margin (OPM) widened to 15.97%—the highest since the March 2012 quarter. Margins for consumer durable firms were also at a 14-quarter high of 8.16%, while auto firms reported OPMs at a four-quarter high of 13.48%.

Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd, said auto companies aren’t offering “too much in price discounts of late", indicating strong pricing power.

“The intensity of savings on raw material is high, but since the prices were maintained and the product and price mix was in favour of higher realizations, things worked very well on the margins front," said Sinha.

To be sure, top executives at car makers said they have passed on some benefits to buyers.

While companies might not have reduced prices, they have passed on the benefits to customers in the form of discounts, said Mayank Pareek, president of the passenger vehicle business unit at Tata Motors Ltd.

While companies may still be offering some discounts, evidence shows that the pricing power of firms is improving, said Bharat Gianani, an analyst at Angel Broking Pvt. Ltd.

“While discounts do remain in the market, they have not gone up, but remain at the same level, indicating that the recovery in the overall market is giving them some (pricing) power," said Gianani.

Gautam Chaochharia, head of research at UBS Securities India Pvt. Ltd, said auto makers and consumer goods firms have been direct beneficiaries of the meltdown in commodity prices and expects the trend to continue for a couple of quarters more as commodity prices are not expected to recover quickly.

Chaochharia, however, added that the full benefits of lower commodity prices could not be reaped as some of the savings were reinvested in the form of higher spending on advertisements and promotions.

This was certainly true for some firms in the consumer packaged goods sector where companies such as Hindustan Unilever Ltd reported a 22% increase in advertising costs in the April-June quarter from a year ago.

For the 31 packaged consumer goods companies in the study, OPM was at 16.97%, an improvement from the 12.57% in the preceding quarter, but lower than what was seen in the December quarter.

In the consumer packaged goods space, gross profit margins have gone up for most companies, but they have used a lot of it for advertising and promotion in an effort to drive volumes amid a slow demand scenario, said Gaurav Dua, head of research at Sharekhan Ltd. Consumer packaged goods firms are more exposed to the sluggishness in rural markets than firms in sectors such as auto.

Not all sectors have seen margins improve.

For cement companies, operating margins narrowed to 15.39% from 17.6% seen in the preceding March quarter. Cement companies’ margins have not benefited as there is drop in prices and realizations were down across India—specifically in the north and west regions, said Dua.

The 14 capital goods firms included in the study also saw margins slip to 9.32% for the June quarter from 9.5% in the preceding three months.

“For industrials, topline growth has been very weak, and hence, they haven’t been able to reap the benefit from falling commodities as much as it is for the consumer-oriented companies. Due to this, the margins for industrials haven’t seen as much improvement as those for consumer focused manufacturers," said Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital.

Ravindra Sonavane and Sapna Agarwal contributed to this story.

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