Graphic: Mint
Graphic: Mint

PMI: Margin pressures to rise for manufacturers, service providers

Despite the high cost burden, companies in manufacturing and services sectors haven't been able to take adequate price hikes due to subdued demand and increased competitive intensity

The pace of business activity in India’s manufacturing and services sectors is losing momentum, showed the latest Nikkei India Purchasing Managers’ Index (PMI) survey. As a result, the headline seasonally adjusted Nikkei India Composite PMI Output Index fell to 51.9 in August from July’s 21-month high of 54.1. A reading above 50 shows expansion, while one below 50 indicates contraction from the previous month.

“The latest reading pointed to a modest rise in overall output that was the slowest in three months," said the August PMI report.

Growth in new work orders for manufacturers, as well as services companies, was muted. Further, input prices continued to rise at a faster pace than the output prices (see chart).

In case of manufacturers, while input cost inflation moderated to the slowest since May, it remained at elevated levels. As per the survey, currency weakness led to higher raw material costs. For service providers, input cost inflation was the strongest since November 2017, largely due to higher oil-related prices.

Despite the high cost burden, companies in both sectors haven’t been able to take adequate price hikes. This is due to subdued demand and increased competitive intensity.

Consequently, their operating margin growth is likely to erode, going ahead, unless of course demand sees significant improvement.

However, considering the pace at which the rupee is depreciating and global oil prices are rising, putting the gloss back on margins without sufficient price hikes would be a tall task for Indian corporates at least in the near term.