At last, petroleum minister Murli Deora announced an increase in petrol and diesel prices on Wednesday, July 1. This increase in price may impact the bottomline of India Inc in the coming months. An FE study reveals that aggregate expenditure on energy of the 324 major companies (including seven power and airline companies) increased by 25.4% to Rs 79,375 crore during 2008-09 from the level of Rs 63,274 crore during 2007-08.
On the other hand, total expenditure of sample companies also increased by 23.9% to Rs 2.67 lakh crore from Rs 2.16 lakh crore. Additionally, the ratio of energy cost to total expenditure increased from 29.30% to 29.69% during the study period. The increasing share of energy cost in total expenditure not only decreases margins, but also disturbs cost control measures of most companies.
An analyst from Goldman Sachs Global Investment Research said, ? The ad-hoc increase in auto fuel prices puts to rest any recent excitement about ?structural reforms? in fuel pricing. Through this announcement we believe the government has indicated that while it is ready to make some difficult decisions on fuel pricing, it is unlikely to leave this entirely to market forces, specially at a time when oil prices are likely entering an up-cycle. The Union Budget on July 6, 2009 should provide clarity on the fuel subsidy structure for FY10, which we believe would make the government the biggest beneficiary.?
As many as 174 of the surveyed companies have witnessed a fall in energy cost to total expenditure ratio, while 150 companies have shown a higher ratio as against 2007-08. The former trend was seen in the case of chemicals, glass, steel, airlines, petrochemicals and fertilizers industry whereas the latter trend was seen in the case of aluminium, cement, paper, sugar and textiles, power and airlines. Of note is a 35.7% increase in power and fuel costs of 21 cement companies at Rs 8,992 crore during 2008-09 from Rs 6,626 crore during 2007-08.
A significant fall in ratio was witnessed in the case of SPIC, Facor Alloys, BOC India, DCW and Tata Chemicals. An opposite trend was witnessed in the case of TN Newsprint, Shree Digvijay Cement and Mysore Paper. Among the sample companies, Mafatlal Industries, Bhilwara Spinners and Amforge Industries reduced their energy cost during 2008-09. On the other hand, significant increase in energy cost was observed in the case of Binani Cement, Nava Bharat Venture and OCL India. Demand is often seen as a trigger for energy costs which in turn is usually directly related to production costs.
The top five in terms of energy cost are NTPC, Reliance Infrastructure, Tata Power, Jet Airways and Torrent Power of which the highest increase in energy cost was observed in the case of Reliance Infrastructure. However the energy cost to total expenditure ratio of Reliance Infrastructure decreased from 61.61% to 61.34% during 2008-09.