With inflation going through the roof, corporate India is feeling the heat. Year-on-year growth in input costs, interest rate and rising bills for power, fuel, salaries and wages are eating into their margins.
The effect of double-digit inflation will be far more severe if it continues beyond September, which economists say is likely. “The March-end financial results clearly show that corporate India is feeling the heat of rising inflation. The dip in margins will reflect on corporate India’s operating leverage and cost pressures,” said the chief financial officer of a leading infrastructure company who did not wish to be named.
Corporate India is unanimous that if the high inflation levels continue, company results will be impacted.
Some interest rate-biased sectors such as auto, realty and finance are already reeling under the effects of high inflation, said Bhart Banka, CEO of Aditya Birla Private equity firm. “Its impact would be visible on other sectors also if high inflation continues over the next three months or more,” he felt.
India Inc has had a good showing in the fourth quarter, with better performances than the previous three quarters, but annual sales growth is lowest in the last four years. The aggregate annual sales of more than 1,700 companies, grew at about 19 per cent in 2007-08 compared to 29.3 per cent in 2006-07, 21.1 per cent in 2005-06 and 31.5 per cent in 2004-05, according to HDFC Securities.
Currently, Indian companies are passing the rising cost to the consumer and still maintaining the growth, but this cannot be sustained long term, said Pradeep Jain, chairman and managing director of Parsvnath Developers. “Beyond a certain level the sale price (in every sector) cannot be increased. And continuous rise in input costs would adversely affect the profit margin,” he said.
The rising interest cost pressures has brought down the fourth quarter profit margins to 9.6 per cent from 10.8 per cent in quarter ended December 2007 on an aggregate basis. This is fifth consecutive quarter when profit margins have dipped.
The two sectors, fast moving consumer goods (FMCG) and metals and mining have posted robust growth in sales and margin in the fourth quarter. The FMCG companies posted a revenue growth of 21 per cent, which is much higher than the average of the previous three quarters.