India Incs raw material expenditures up in Q1

Written by Pradip Kumar Dey | Mumbai, Aug 29 | Updated: Aug 30 2008, 08:21am hrs
Rising inflation and a huge rally in commodity prices all over the world has started to have a telling impact on India Inc's profitability, reveals a study by FE. While much of this was expected, the extent of impact is actually quite severe, as the study has found: for a sample of 2,036 companies, raw material costs have increased by 37.4% in the first quarter of FY'09, touching Rs 2.85 lakh crore as against Rs 2.08 lakh crore during the same period of the previous year.

This growth in raw material costs coupled with other cost escalations, especially on the personnel front, has caused total expenditure to balloon by 41.6% year-on-year to touch Rs 4.98 lakh crore during April-June 2008. It was Rs 3.52 lakh crore during the corresponding period.

This had an impact on the earnings growth and net profit of the sample; it increased by a meagre 7.3% to Rs 37,507 crore during April to June 2008. Several earlier quarters had returned double digit growth rates.

Significantly, average cost of raw materials accounts for slightly more than 57% a company's of the total expenditure.

Even a small increase in its cost influences profits significantly. The study however reveals that share of total expenditure spent on raw materials decreased steadily for the sample during the first quarterby about 1.77 percentage points from 59.05% in April-June '07 to 57.28% in April-June '08.

This is a small solace, reckon experts.Along with raw materials, there has been a significant increase in fuel and manpower costs. Hence the share of raw materials seems to have gone down a wee bit. But the fall is insignificant as raw material costs still form a crucial part for manufacturing firms, said an analyst.

However, there were some companies that managed to control the share of raw material costs amongst other cost components.

Among the 2,036 companies thyat constituted the study, 1,066 companies witnessed a fall in raw material to total expenditure ratio, while 970 companies returned a higher ratio in April-June '08 compared to April-June '07.

This assumes importance given that an increase in the share of raw materials in total expenditure not only reduces margins but also hampers competitiveness of companies. In other words, it indicates poor utilisation of raw materials.

At the individual level, many sample companies increased raw material costs significantly during April-June '08.

Significant increase in raw material cost during April-June 2008 was observed in case of fertilisers (63.6%), pesticides (61.20%), refineries (59.1%) and paper (45.7%).