India Inc faces a margin squeeze | Economic Times

Mumbai: Corporate India is out of the woods — its top-line is rather cheerful — but profits are beginning to get squeezed on higher input prices. At the margins, therefore, the downtick is material enough to revisit aggregate costs —on materials.Take Bajaj Auto, for instance. The Pune-based auto major expects cost inflation of 3% in the September quarter, of which 2% is expected to be offset through price increases. Maruti Suzuki, India’s biggest carmaker, saw a margin impact of 3.5 percentage points sequentially in the June quarter and expects a further effect on the September quarter performance before a semblance of stability returns. It is walking a tightrope of cost pass-through, demand, and market share.The Hindustan Unilever management said commodity inflation could curtail margin expansion in the near term, but the company would continue to take reasonable price increases to offset the impact of higher input expenses. At Britannia, gross margins were significantly affected in the June quarter by input cost pressures, especially of palm oil and crude. The company has been resorting to price hikes. In the future, it will continue to implement price increases to entirely offset the impact of inflation.“Consumer, auto, chemicals, and cement companies have indicated that sharp commodity inflation might impact their gross margins,” said Gautam Duggad, head of research, Motilal Oswal Financial Services. “Pharma companies have indicated a slowdown in new approvals for generics players and raised concerns about rising supply chain costs, impacting profitability over the near to medium term. IT companies are adding employees unprecedentedly. So, attrition-led supply pressure on margins remains a crucial concern.” 85605385In consumer electricals, leaders at Havells and Crompton Greaves have indicated that minor price increases would be needed to cover the commodity cost inflation entirely. In durables, commodity price inflation has weighed on margins, with the Blue Star management hinting at the need to evaluate further price hikes after the festive season.Manufacturers of specialty chemicals believe that pressure on margins due to higher raw material and freight costs is likely to continue for a couple of more quarters before the charge is passed on to the customer in line with varied customer contracts, said a note by Motilal Oswal Financial Services. According to the Vinati Organics management, higher freight costs along with an increase in phenol and acrylonitrile prices impacted margins. Freight costs were the highest for the US and Europe: They are likely to remain at similar levels for the next few quarters.“Lower raw material costs, which were a great support to margins, have now risen, and this has already started to weigh on margins across sectors, especially consumers. Cement and chemicals were the only exceptions which saw improvement in margins as higher costs were passed through,” said Aditya Narain, head of research, Edelweiss Financial Services. “Going ahead, while sequentially margin pressure may be close to peaking, it is likely to remain higher year on year.”However, most bank managements have indicated a sharp recovery in momentum from July 2021. They expect loan growth to revive in the retail and SME segments, assuming no adverse impact of a potential third Covid wave. NBFC commentaries suggest collection efficiency (CE) was impacted in the first two months of the quarter. Most managements believe margins are sustainable at current levels in FY22..