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Elevated inflation raises pressure on firms’ margins

A large number of such products, including semi-finished steel, textiles, basic metals, chemicals, rubber and vegetable oils, witnessed inflation in the range of 12% to 26% in March, according to the WPI data released on Monday.

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As many as 17 of the 21 sub-groups of the core index recorded a month-on-month rise in March.

The spurt in the wholesale price index (WPI) to a 30-year peak in FY22, albeit aided by an unfavourable base, highlights India Inc’s struggle in recent months with elevated input costs, as the index is dominated by raw materials and intermediate goods.

A large number of such products, including semi-finished steel, textiles, basic metals, chemicals, rubber and vegetable oils, witnessed inflation in the range of 12% to 26% in March, according to the WPI data released on Monday. Meanwhile, the surge in fuel and power inflation (it has exceeded 30% in each month since October 2021) has caused a spike in logistics costs and spilled over to other related areas as well.

On top of this, if the central bank is forced to raise interest rates as early as June in response to rising inflation, companies’ borrowing costs will inch up further.

While strong external headwinds such as the Russia-Ukraine conflict has driven up oil prices, disrupted supply chains and aided a global commodity rally, companies are finding it hard to pass on the spike in input costs entirely to consumers, given the slackness in domestic demand conditions. It has threatened to erode their margins and bite into their profitability, said analysts.

At the same time, elevated inflation in raw material segments has made life tougher for micro, small and medium businesses that were already grappling with depleting cash flows in the aftermath of the pandemic (although government intervention through programmes like the Rs 5-trillion emergency credit line guarantee scheme has somewhat assuaged the pain). MSME exporters, particularly, are finding it hard to honour supply commitments on time, given the surge in inputs prices, high shipping costs and their limited financial muscle to tide over such issues.

According to a Crisil report, corporate profitability, or the average Ebitda margin, may have dropped by 200-300 basis points (bps) on year and 40-60 bps sequentially in the fourth quarter of FY22. This is based on Crisil’s analysis of over 300 companies (excluding those in the financial services, and oil and gas sectors). It marks the second year-on-year decline in Ebitda 12 quarters, the agency added. This trend may exacerbate in the coming quarters unless inflationary pressure abates.

Of course, in certain segments, a limited pass-through of price rise has taken place, resulting in a surge in retail inflation, which hit a 17-month high of 6.95% in March. Still, there is a huge divergence between the two price gauges, as the WPI inflation remained as high as 14.55% in March.

Pronab Sen, noted economist and former chairman of the National Statistical Commission, said the WPI is measuring what is on the producers’ side. Since the WPI has a very high weight of raw materials, when the commodity prices go up substantially, the WPI, too, rises accordingly. “The pass-through between the WPI and the CPI depends on the ability of producers to pass on the rise in input costs. That process is probably weak now because of weakness in the economy. But there are some sectors (in the formal economy) where producers are able to pass it on, but it’s not the case with all sectors,” he said.

India Ratings principal economist Sunil Kumar Sinha said, “The higher input cost especially of raw materials have got aggravated due to the Russia-Ukraine conflict. As the conflict does not seem to be coming to end soon, the headwinds arising out of the disruption in global supply chain, coupled with uncertainty, will continue to put pressure on domestic wholesale inflation.”

Aditi Nayar, chief economist at Icra, said the core WPI witnessed a broad-based and massive 2.2 percentage-point jump in sequential terms in March 2022, a fallout of the geopolitical tensions; it jumped to 10.9%. As many as 17 of the 21 sub-groups of the core index recorded a month-on-month rise in March.

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