India Inc on high alert as margin pressure and demand concerns weigh

NEW DELHI : Soaring inflation is becoming a headache for businesses and consumers alike. Rising input costs are a major drag on corporate profits, although some have managed to pass the costs on to consumers.

A Mint analysis of 435 manufacturing companies that reported their March quarter earnings showed input costs rose about 24% from a year earlier, and a significant number of them were successful. to pass on the high costs to consumers, recording higher revenues. Some companies charge consumers more by reducing the weight of packaged products.

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Compression of inflation

“The impact of inflation is visible. More companies beat the Nifty 200 Index’s March quarter earnings season estimates than those who missed them,” said Deepak Jasani, head of retail research at HDFC. Securities. “However, much of this growth is likely to have been driven by price increases taken amid inflationary pressures. »

Sales growth was good, but profits grew at a slower pace due to higher raw material costs and interest charges, he added.

As input costs rose, companies either raised prices or reduced pack weights. Retail price inflation in April hit an eight-year high of 7.79%, even as the reading remained above the central bank’s 6% upper tolerance limit for the fourth month of ‘april.

“There was about a 100 basis point impact on the margins of the companies in our coverage universe and a 200 basis point impact on the margins of the Nifty companies,” said Gautam Duggad, head of research at Motilal Oswal Financial Services. Overall results were in line with expectations, added Duggad, with performance driven by financials.

Analysts said that while companies in some sectors such as chemicals and fertilizers recorded positive earnings surprises and appear to have been able to pass on costs, other sectors such as paints, cement and consumer packaged goods are among the hardest hit by rising commodity prices. prices and have yet to fully pass the costs on to consumers. “Major margin pressure would be visible in first-quarter earnings if companies are unable to pass on input costs, and companies will pass on 40-50% of the impact of higher commodity prices. on the buyers and the rest will be hit by the hopes of a cooling-lower price rise in the near term,” said Prashanth Tapse, Vice President (Research) at Mehta Equities Ltd.

Pressure on input costs has been unprecedented and therefore continues to be visible in shrinking gross margins despite aggressive price increases, said Manish Jain, fund manager at Ambit Asset Management. Jain said recent price increases may have mitigated the situation, but the impact will only be partially visible in the June quarter and fully in the following three months.

A bigger concern is the results for the following quarters given the continued rise in commodity prices and inflation and its impact on consumer and business spending, Jasani said.

Moreover, maintaining a balance between growth and profitability is always a tricky thing, especially in these times of inflation, experts said. Companies don’t want to lose market share in their quest to maintain margins, Jain said.

Mehta also said companies are cautious in passing on costs and managing to maintain decent revenue growth as demand is intact for products such as edible oil, where higher costs have been passed on almost entirely to the buyers.

Duggad said price increases remain demand driven and if demand holds up, companies may be able to pass on costs.

It’s not just high prices; rising interest rates may affect demand. Monthly payments could rise and lending to customers will become expensive and reduce liquidity in the market and the economy, analysts said.

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