Whether or not to raise prices: consumer companies caught in a trap
High commodity inflation also impacted Maruti Suzuki’s margins in the December quarter, with its Ebitda down 30% on an annual basis.
Companies in the construction, real estate, FMCG, automotive and aviation sectors are caught in a bind with commodity prices set to rise further due to fallout from the crisis Ukrainian. If they pass on higher input prices to consumers, demand could be affected as several rounds of price hikes have been undertaken before; if they don’t, their margins will continue to be under pressure in the next quarter.
Take the case of Tata Motors. During the December quarter, high commodity inflation impacted the company’s consolidated Ebitda (earnings before interest, tax, depreciation and amortization) which declined 34% year over year. another at Rs 7,395 crore, while margins fell 460 basis points on the year. -year at 10.2%.
In its management commentary, the company had taken into account concerns about inflation, but hoped that the shortage of semiconductors would improve, as would volumes. However, with the Russian invasion of Ukraine, the automotive sector is unlikely to be relieved of the shortage of semiconductors. Indeed, Russia and Ukraine produce around 75% of the neon gas used to make semiconductors. If the pressure on input costs does not ease, the company may have to consider price increases in April, which could affect demand.
So far in the current fiscal year, the company has increased its prices four times.
High commodity inflation also impacted Maruti Suzuki’s margins in the December quarter, with its Ebitda down 30% on an annual basis. Margins were down 278 basis points year-over-year to 6.7% in the quarter.
According to estimates drawn by analysts at Kotak Institutional Equities, commodity basket prices for automakers have risen 90 to 160 basis points so far in the January-March quarter and 170 to 360 basis points on current spot prices from December quarter levels due to the strong rise in aluminum and precious metals prices.
Kotak said gross margins at Maruti Suzuki and two-wheeler makers would be negatively affected as aluminum and precious metal prices jumped more than 30% from December quarter average levels. Also, price increases, especially in the two-wheeler segment, will be difficult given the low demand scenario.
Likewise, the aviation sector will be hit hard by the continued spike in crude oil prices which is driving record levels of jet fuel. Aviation jet fuel (ATF) prices were raised for the fifth time this year, taking it to a new high, with the last increase coming on March 1.
Prices increased by Rs 3,010.87 per kiloliter or 3.22% to reach Rs 93,530.66 per kl in Delhi. In early January, ATF prices rose by more than Rs 19,000. Analysts say with the ongoing Russian-Ukrainian crisis, prices see no signs of easing, which will impact airline margins in the fourth quarter .
The story is the same in other consumer-facing industries. The high inflation of raw materials continued to weigh on the margins of paint companies, for example. During the December quarter, Asian Paints experienced input price inflation of 4%. The company increased the price of its products by 15% in the quarter and its gross margins improved 180 basis points quarter-on-quarter to 37.5%. The actual price increase taken in the nine months of FY22 is 22-23%, which has never been taken in recent company history.
Berger Paints also recorded cumulative price increases of 24% over the nine-month period. Other players, including Kansai and Akzo, also increased their prices by 17-20% over the same period. Analysts say rising input prices will continue to be a margin hurdle in the coming quarters for these companies.
Property developers are already very worried about the sharp rise in prices of key raw materials like steel and cement, as they struggle to pass on rising costs to customers for fear of losing them.
A recent CII-Anarock survey found that an increase of less than 10% would have a moderate to low impact, while an increase of more than 10% would have a deeper impact on buyer sentiment. However, if commodity price inflation continues, some developers may consider raising the price of new launches by 10-15%.
Niranjan Hiranandani, Managing Director of the Hiranandani Group, told FE: “As a result of geopolitical tensions, market uncertainties, supply chain disruption and record high crude oil prices, it is estimated that oil prices new market launches increased by 10%-15% varying by geography, project size and scale.” He said the sharp rise in raw material prices was impacting profit margins with disruptions in logistics, timely deliverables and the absorption of rising costs.
Getamber Anand, chairman and chief executive of ATS Group, said the problem is not new sales, but rising commodity inflation. “Today steel is at Rs 80,000 a ton and it is not going to go down anytime soon. Cement is at Rs 400 a bag,” he said.