Raw material costs of public sector undertakings came down by 9.8% last year against a rise of 24.4% in the year before. An FE study reveals that aggregate expenditure on raw materials of 41 PSUs decreased to Rs 3.29 lakh crore in 2009-10 from Rs 3.64 lakh crore in 2008-09. Their raw material cost was far lower, at Rs 2.93 lakh crore, in 2007-08.
Reasons for the sudden dip in the PSUs? raw material costs last year, analysts believe, could be the slow world economic recovery and lower domestic demand. According to the head of CNI Research, another reason could be the stock-piling of raw materials in FY09 and their subsequent use in FY10 by the PSUs. Says Kishor P Ostwal, CMD, CNI Research: ?2008-09 was a year of global turmoil. Even China was facing overcapacity and it stopped imports of raw materials. PSUs took advantage of the situation and accumulated enough inventories at lower prices, which resulted in a significant hike in their raw material cost that year. They were using the old inventories for production last year, hence their raw material cost was lower in 2009-10.?
Total expenditure of the sample companies mirrored the trend. Aggregate expenditure of the 41 PSUs fell 11.6% in FY10 against a rise of 23.9% in FY09. The average cost of raw materials accounts for a shade more than 47% of the total expenditure of a company, and even a small increase or decrease in its share influences profit significantly. The share of raw material cost to total expenditure steadily increased from 46.23% in 2007-08 to 46.42% in 2008-09 and further to 47.41% in 2009-10.
Significantly, the net profit of these PSUs grew 32.2% in FY10 against a decline of 18.85% in FY09.
The total expenditure of the 41 PSUs were at Rs 6.94 lakh crore, Rs 7.85 lakh crore and Rs 6.34 lakh during FY10, FY09 and FY08, respectively.
Among the 41 PSUs, 21 saw a fall in the raw material-to-total expenditure ratio in FY10, while 20 showed a higher ratio compared to the previous year.
A decrease in the share of raw materials in total expenditure points to improved margins and competitiveness of a company. In other words, it indicates better utilisation of raw materials.
However, taken separately, many sample PSUs showed an increase in their raw material cost in 2009-10, prominent among them being Bhel, Petronet LNG, Indraprastha Gas, Oil India, HMT, Scooters India and Orissa Minerals. Of these, the raw material cost of Petronet LNG increased by 31% to Rs 9,665 crore during 2009-10, which came on top of 32.5% rise during 2008-09. The company attributes this primarily to the full utilisation of name plate capacity of its Dahej LNG terminal.
In contrast, a significant decline in the raw material cost was seen with RCF, FACT, ONGC, Hindustan Organic Chemicals, Maharashtra Electrosmelt and CPCL.