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Business News/ Market / Mark-to-market/  Sales and pricing power deteriorating in tandem
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Sales and pricing power deteriorating in tandem

When demand is weak and there is ample spare capacity, falling inflation can erode pricing power

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

Falling input costs is good news for profitability, but could make life difficult for those in sales. When demand is weak and there is ample spare capacity, falling inflation can erode pricing power. Sales growth is a function of both volume and price, and if both are low on energy, sales expansion targets are difficult to achieve.

The accompanying chart plots State Bank of India’s (SBI’s) Corporate Pricing Power Index and the Reserve Bank of India’s compilation of year-on-year sales growth of private manufacturing companies. The pricing index measures average changes in prices of domestic producer companies in the Wholesale Price Index, and a lower value implies weak pricing power. The index has declined after July last year and even turned negative in March. Corporate sales growth, too, has weakened, and analyst estimates for the March quarter indicate low or falling sales growth.

Lower commodity prices are the main cause of falling inflation, and there are no indications that a reversal is due. However, pricing power is also weak because demand is sluggish and that is seen in low levels of capacity utilization. A central bank survey showed capacity utilization in manufacturing was 71.7% in the third quarter of 2014-15, compared with 73.5% in the year-ago three months.

Eventually, since lower inflation benefits disposable incomes, volume growth should improve. However, price-led growth may take more time. Unless inflation reverses or demand recovers such that utilization levels improve, reviving sales growth quickly may prove difficult.

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Published: 17 Apr 2015, 01:03 AM IST
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