Rising raw material costs are crimping corporate profitability as many companies are unable to hike prices to fully offset costs
Rising raw material costs are crimping corporate profitability as many companies are unable to hike prices to fully offset costs, especially because of sharp increases in metal and energy prices.
While consumer durables and packaged goods companies expect to pass on costs to customers through calibrated price increases between 5% and 10% in the next few months, not all companies can wield such pricing power.
“We will wait till the end of the fourth quarter to see how demand pans out. We have hiked prices over the past year. We are also expecting metal prices to cool," a senior executive at a manufacturer said on the condition of anonymity as the company is in the so-called silent period ahead of its quarterly earnings announcement.
Global commodity prices rose sharply through most of the second half of 2020 and the first half of 2021 as the strong post-covid recovery in China fuelled demand for metals and fuels.
Indian hot-rolled coils (HRC) or flat steel prices doubled over June 2020 to October 2021 due to a rally in Asian prices. Global aluminium prices also doubled in this period.
However, after a year-long rally, global steel and aluminium prices have softened on China demand concerns.
“Indian HRC steel price doubled from June 2020 to October 2021 but is down 12% since then to ₹64,000. Coking coal, conversely, almost doubled in the second half of 2021, pushing up costs. We believe Indian steel margins have peaked in the first half of fiscal 2022 and will fall sharply by FY23, albeit settle above historical levels," said Jefferies India in a 10 January note that assumes FY23 steel price of ₹58,000 and coking coal price of $230 per tonne. Aluminium rose 60% in the 10 months to October but is down 7% since then to $2,913.
India’s corporate sector is facing margin pressure for the first time in 12 quarters as companies cannot entirely pass on the rise in input costs to consumers, rating agency Crisil said.
Corporate profitability, as defined by the earnings before interest, taxes, depreciation and amortization (Ebitda) margin, likely narrowed 100-120 basis points (bps) from a year earlier and 70-100 bps sequentially in the quarter ended December, Crisil’s analysis of 300 companies (excluding those in the financial services, and oil and gas sectors) showed.
“Companies were unable to fully pass on soaring input costs, especially key metals and energy prices. Flat steel prices were 48% higher on-year in the third quarter, while aluminium was up 41%. The price of Brent crude surged nearly 79%, while those of spot gas and coking coal rocketed almost 5.4 times and 2.4 times, respectively, on-year," said Hetal Gandhi, director, Crisil Research.
For the first nine months of this fiscal, the Ebitda margin widened 80-100 bps from a year ago to 22-24%, aided by the low base of last year. Ebitda profit growth should moderate to 10-12%, against 47% clocked in the first half of this fiscal, Crisil said.
Corporate revenue is estimated to rise 16-17% to ₹9.1 trillion is the first nine months of the fiscal, driven by surging commodity prices, Crisil said.
“Though revenue growth is in line with expectations, the underlying reasons have changed over the past three quarters. While volume growth continued to underperform, price hikes provided some offset," Crisil added.
In the consumer segment, leading packaged consumer goods companies effected price hikes of 6-8% in the first half of this fiscal, and prices likely remained high even in the current reporting quarter.
“With the sector facing record-high unprecedented inflation (10-year high), it has taken a toll on Hindustan Unilever Ltd’s volume growth. In some packs, the company has resorted to grammage cuts to indirectly take price hikes. This will lead to optically low volume growth despite the same number of packs being sold," said Edelweiss Research in a 12 January report.
Overall, such an inflationary environment across the board puts pressure on consumer’s wallets and, hence, volume growth is impacted across the staples industry especially in rural areas, it added.