Rupee depreciation contributes to hike in raw material spending

Written by Pradip Kumar Dey | Updated: Dec 12 2008, 04:45am hrs
Depreciation of the rupee and high inflation are responsible for increasing corporates input costs in Q2, a study by FE has revealed.

The study has found that the aggregate expenditure of 1853 companies on raw materials increased 54.1% to Rs 3.22 lakh crore during July-September this year from Rs 2.09 lakh crore during the year-ago period.

On the other hand, total expenditure of the sample companies increased 49.2% to Rs 5.43 lakh crore from Rs 3.64 lakh crore during July-September 2007. The net profit of the above companies taken together decreased 48.1% to Rs 21,634 crore during the second quarter this fiscal.

Average cost of raw materials accounts for slightly more than 59% of the total expenditure of a company and even a small increase in its share influences profit significantly.

The share of raw material costs in total expenditure of the sample companies was higher during July-September 2008 compared to the same period in the previous fiscal. It increased by about 1.89 percentage points; from 57.40% in July-September 2007 to 59.29% in July-September this year.

Among the 1853 companies that constituted the study, 871 companies witnessed a fall in raw material costs to the total expenditure ratio, while 982 companies witnessed a higher ratio in July-September 2008 compared to July-September 2007.

An increase in the share of raw material costs in the total expenditure not only reduces margins, but also hampers competitiveness. An analyst from a rating agency said, The fertiliser industry has suffered due to the significant increase in the price of all raw materials and intermediates like rock phosphate, sulphur and phosphoric acid.

Ratan Tata, chairman, Tata Steel mentioned in a report that the global steel industry predictably faced a pressure on margins arising from cost increases in iron ore and coking coal, but for the most part of these increases were absorbed by the market through steel price increases.