Firms brace for cost inflation as commodity prices catch up1 min read . Updated: 17 Dec 2020, 10:24 PM IST
Analysts attribute this increase in prices to the lag in supply-chain restoration and robust demand from China
India Inc. needs to gear up for a gradual increase in raw material costs due to the recent rise in some global commodity prices. In the past three months, prices of crude oil and steel have risen sharply by around 30% and 15%, respectively. Analysts attribute this increase to the lag in supply-chain restoration and robust demand from China.
Hard hit by the pandemic, corporates opted for massive cost rationalization measures to shield their earnings performance. In the past two quarters, companies cut back on employee and advertisement costs, and other operating expenses. However, with businesses resuming normalcy, most of these savings will reverse. This, coupled with the ongoing increase in raw material costs, may push companies to initiate price hikes to curb margin erosion.
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“Raw material forms a major part of the cost structure in the P&L. For Nifty50/Nifty500, in September 2019, raw material cost formed 34%/36% of total expenditure which has fallen to 28%/34% in September 2020. Highest year-on-year raw material contraction was seen in auto & ancillaries, oil & gas, discretionary, and industrials. Q-o-Q, higher raw material cost seen across all sectors," research house PhillipCapital (India) Pvt. Ltd said in a report on 17 December.
Although commodity prices haven’t hit their historic highs yet, analysts said the days of benign raw material cost are now behind. While input costs may not rise in a hurry, they are unlikely to remain soft, they added.
JM Financial Institutional Securities Ltd analysts expect companies in the automobile, aviation, consumer durables and industrials sectors to pass-on some of this increase. “Overall, a 1% change in metal prices adversely impacts automobile OEM margins by 10-20 basis points. The likely c.200bps of GM impact in Q4FY21 is expected to be mitigated by price increases, a better product mix, cost optimization, and a rise in exports. For consumer electricals, a 5-8% price increase is expected, which would broadly offset cost inflation," it said in a report on 15 December.
Some auto majors, such as Hero MotoCorp. Ltd and Maruti Suzuki India Ltd, have already announced price hikes from 1 January. However, not all firms are at a disadvantage, and oil and metal companies will be among the key beneficiaries of rising commodity prices.