India Inc battles surging input costs

Written by Pradip Kumar Dey | Mumbai, Jul 8 | Updated: Jul 10 2008, 04:47am hrs
Rising costs of raw materials have pushed Indian companies to a tight spot. While the prices of iron ore and agri-products, among others, have increased significantly, companies could not hike the price of finished products to that extent. This has resulted in pressure on profit margins.

According to a study by FE, the aggregate expenditure of the 1,236 major companies (with sales above Rs 10 crore) on raw materials increased by 16.4% to Rs 7,55,573 crore during 2007-08.On the other hand, the total expenditure of the sample companies increased 17.1% to Rs 12,81,620 crore during 2007-08 from the level of Rs 10,94,839 crore during 2006-07. Sales for these companies also increased by 16.9% to Rs 14,47,874 crore during 2007-08. And, the profit margin (net profit to sales) grew marginally from 7.24% in 2006-07 to 7.65% in 2007-08. The average cost of raw materials accounts for nearly 59% of the total expenditure of a company, and even a small increase in its share influences profit significantly.

According to the FE study, a significant increase in the ratio of raw material to total expenditure was seen in the case of cigarettes (43.88% in 2006-07 to 47.28% in 2007-08), diversified (44.70% to 48.89%), engineering (43.10% to 46.80%), food & products (66.56% to 74.64%), solvent extraction (76.83% to 81.27%) and tea (24.98% to 32.83%).

Significantly, however, a reverse trend can be seen in the case of aluminium (70.61% to 68.68%), chemicals (63.11% to 61.65%), fertilizers (63.11% to 55.95%), pesticides (58.07% to 56.97%), sugar (75.17% to 72.69%) and tyres (73.26% to 71.95%).

The highest increase in raw material cost was witnessed in the case of engineering (52.9%) followed by tea (43.6%), solvent extraction (37.8%), food & products (36.7%) and the diversified sector (27.6%).

Among the sample companies, 597 firms witnessed a fall in raw material to total expenditure ratio, while 639 companies have shown a higher ratio in 2007-08, compared to 2006-07. Significant increases in the ratio was observed in the case of Morepen Labs (40.36% in 2006-07 to 68.23% in 2007-08), Tata Tea (36.6% to 56.21 %) and Zenith Birla ( 62.44% to 80.22%).

An opposite trend can be seen in the case of National Fertilisers (85.18% to 59.37%), PG Foils (79.89% to 54.65%) and GTN Inds (56.10% to 32.30%).

At the individual level, many sample saw steep increase in raw material cost during 2007-08. Mention may be made of Temptation Foods (1,070.6%), Flawless Diamond (276.8%) and Maithan Alloys (203.5%). A significant decline in raw material costs was observed in the case of FACT (-51.7%), ITI (-36.9%) and Ingersoll Rand (-30.2%).