Indian companies see pressure for 2-3 quarters

Indian companies see pressure for 2-3 quarters
Published: 11 August 2011

Indian manufacturers are facing increased production costs while prices are declining, putting pressure on margins and analysts see the margins pressured for the next 2-3 quarters.

While domestic coal prices have increased almost 30%, freight costs have also gone up in tandem with fuel prices.

And with demand projections for the rest of the fiscal too staying sluggish, the passage of input cost rise seems difficult.

In a recent earnings call, Grasim Industries reduced its demand growth guideline from 8.5% for the fiscal 2012 to 7.5% for second half of the current fiscal. JP Morgan analyst Pinakin Parekh sees risk to this projection as well.

"We see risks to our 7% fiscal 2012 estimate for industry growth rates," he wrote in July note.
ACC Ltd, the major cement player, recently said that steep increases in the costs of coal, diesel, freight and other manufacturing inputs such as fly ash and gypsum resulted in lower profitability. Grasim, too, sees high input costs squeezing margins.

"Margins will remain under pressure as freight costs have increased and average realisations have fallen by INR15-20 per bag in the past few months. Margins could decline INR300-400/t in the September quarter," said an analyst from a domestic brokerage.

Another analyst said that September quarter margins would be under more pressure as the full effect of fuel cost increase would reflect by then.

"Margins will not be as significant as they were in the March and June quarters. While on a year-on-year basis margins would look better given the same period last year was equally bad. We would see some pressure on a sequential basis. Further, total cost of production for cement companies is expected to peak out in the ongoing quarter," said the analyst.

Both analysts do not expect a significant further downside in cement prices, except for the usual seasonal lull in prices.

"Cement prices have already declined, don’t expect any major fall as companies continue with production discipline as they have realised profitability is crucial than volumes," one of the analysts said.

However, Murtuza Arsiwalla and Shubham Satyarth from Kotak Institutional Equities said continuing with the production discipline would be challenging.

"The industry has managed to maintain price at reasonable levels despite the onset of the monsoon. However, continued weakness in demand and consequently a dip in utilisation could result in a potential disruption of the pricing discipline," the analysts wrote in a July note.