A study carried out by FE on a sample of 1,790 companies has revealed that expenditure on raw materials increased 6.3% to Rs 2.40 lakh crore during the October-December 2008. Raw material cost for the sample was Rs 2.25 lakh crore during the October-December 2007 period.
On the other hand, total expenditure of the sample companies during the period was at Rs 4.58 lakh crore, up 14.7% as compared to the Rs 4 lakh crore total expenditure during the year-ago period.
Net profit of the companies taken together decreased 56.9% to Rs 18,046 crore during the study period.
Average raw material cost accounts for slightly more than 52% of the total expenditure of a company, and even a small fluctuation in its share influences profit significantly.
The share of raw materials in total expenditure of the sample companies decreased steadily during October-December 2008, compared to the year-ago period.
It has decreased by about 4.12 percentage points, from 56.43% during October-December 2007 to 52.31% during October-December 2008.
Among the 1,790 companies that constituted the study, 964 companies witnessed a fall in the raw material to total expenditure ratio, while 826 companies returned a higher ratio during the period.
A hike in the share of raw material cost in total expenditure not only reduces margins, but also hampers competitiveness of companies. In other words, it indicates poor utilisation of resources.
At the individual level, many among the sample companies saw a significant increase in raw material costs during October-December 2008. In this regard, mention may be made of FACT (480.5%), United Phosphorus (126%) and Jai Balaji Industries (106.4%).
The study also looked at the input cost issue of 35 different industry verticals. A significant decline in the raw material cost to total expenditure ratio was seen in the case of aluminium, automobiles, cement and products, chemicals, electric equipments, fertilisers, food and products, petrochemicals, pharmaceuticals, refineries, solvent extractions and textiles.
The ratio rose significantly in the case of gems and jewellery, electronics, paper, steel, cigarettes, sugar, tea, paints, personal care products, pesticides and tyres.
Among the fertiliser companies that were part of the study, a significant increase in raw material cost was seen in the case of Zuari Industries. Raw material cost of the company increased by 112.7% to Rs 1,052 crore during the October-December 2008 period; it was Rs 495 crore a year ago. However, the ratio of raw material cost to total expenditure of the company decreased from 74.50% to 51.64% during the study period.