That rising inflation and limited pricing power have squeezed profit margins of manufacturing sector companies are clear from the early trends from the second-quarter earnings season. Costs increased as petroleum prices flared, power costs climbed, commodity prices jumped to multi-year highs and supply chains disruptions took time to repair. The second-round effects of elevated petroleum prices have also taken their toll.
Companies across the board—from diversified FMCG majors such as Hindustan Lever and Tata Consumer Products, paint maker Asian Paints and Kansai Nerolac, electrical and consumer goods maker Havells and Orient Electric, tyres maker Ceat, steel manufacturer JSW Steel, cement producer UltraTech and automobile maker Maruti Suzuki—have spoken of how inflation hurt margins in the past quarter.
Most of these companies have also said that calibrated increases in prices will continue in the third quarter, as they attempt to pass on higher input costs without denting demand. Some manufacturers such as cement and paints makers have already raised prices in the past few days.
Companies usually refrain from giving details of the actual impact of higher costs of key inputs on their operations, but the wholesale price index gives some insight. That said, the impact of rising costs is not uniform across companies in any sector, as long term contracts with suppliers protect from some price escalations.
The rise in prices of petroleum crude and its derivatives increased the cost of transportation and freight across the board. For a large universe of manufacturers, it pushed up input costs. The wholesale price index (WPI) shows that the inflation for crude petroleum climbed 68.1% in the second quarter, from a year ago. On a sequential basis, it rose 7.4% in the second quarter.
Over the past year and a half, the Indian basket of petroleum crude flared up from under $20 a barrel in April 2020 to $65 by March 2021 and $74 by September 2021. The impact on transportation and freight is not captured in the WPI, as the index tracks only price changes for primary and manufactured goods.
The inflation for petrol and diesel rose by 58% and 52%, respectively, as their trade parity prices climbed. Taxes on goods are not included in the WPI. The rise in diesel made freight and standby power more expensive.
The cost of generating power for units using naphtha, petroleum coke and furnace oil as feedstock were also up. The quarterly inflation of all three fuels climbed 54-72%. Naphtha is also a key input for making plastics.
Carbon black, another derivative of the crude oil refining process, climbed 61%. Carbon black is used in the manufacture of tyres, industrial hoses, engineering plastics, cables, paints and batteries among other things.
For the processed food industry, the sharp increase in the price of oilseeds and edible oils increased the cost of producing packaged food.
The quarterly wholesale price index for oilseeds climbed about 49%, with soyabean rising a searing 103%. Mustard and rapeseed inflation climbed 32%. Soyabean prices were boosted globally by a rapid increase in demand from China.
The rise in prices of oilseeds and other inputs such as solvents led to a sharp increase in the wholesale prices of edible oils. The quarterly rise in the wholesale price index for popular cooking oils was between 44% for palm oil and 50% for soya oil.
Leading edible oil makers such as Adani Wilmar have taken sharp increases in prices in the past few quarters. Processed food makers such as Hindustan Unilever, ITC and Brittania as consumers of edible oils have passed on some of the increased costs through calibrated price increase to retail consumers.
The rise in prices of metals since the middle of the last calendar year increased the cost of inputs for users of iron and steel, aluminium and copper. The hardening of metal prices affected makers of industrial, commercial and household goods. Metal prices are expected to remain elevated due to the rising demand from advanced and developing countries. All user companies – from JSW Steel to Maruti Suzuki to Havells – have red-flagged high metal prices.
The major metals used to manufacture steel rose sharply. Sponge iron, ferrochrome and ferromanganese rose 38-46% on the wholesale price index during the second quarter of 2021-22, from the same period year ago. Products made from steel also reported a similar increase.
Mild steel flat products climbed 44%, with a similar increase reported for hot rolled and cold rolled products. Hot rolled steel is used in construction and for making pipes, tubes, railway tracks and train carriages. Cold rolled steel is used for making home appliances and metal furniture, as well as for building steel sheds and industrial buildings.
The increase in metal prices also raised the price of electrical products and parts. Electrical wires, including aluminium and copper wires and cables, were up 27-38%, putting pressure on prices on the electrical equipment, a point that was made by the Havells’ management.
Manufacturers also felt the impact of an increase in the cost inputs made by combining derivatives of crude petroleum with chemicals. For instance, alkyl benzene and monoethyl glycol rose 36% and 43%, respectively. Alkyl benzene is an input for the manufacture of detergents and monoethyl glycol for polyester fibre and films, engine coolants and PET resins.
The input costs for the manufacture of plastics saw some increase. The increase ranged between 20% and 44% for plastic tubes, acrylic sheets, plastic bags, polypropylene films and PVC fittings and accessories.
The cost of manufacturing fertilisers rose as key inputs such as ammonia gas, ammonia liquid and sulphuric acid climbed 44-72% during the quarter. Acetic acid, used in a variety of processed food products such as ketchup, mayonnaise and pickles, experienced a sharp quarterly increase of 88%.
Manufacturers also took a hit due to the higher costs of packaging materials made of paper and plastics. Paper products such as cardboard and bags were 32-49% higher during the quarter. Additionally, processed food manufacturers have taken a hit due to the rise in prices of agricultural commodities other than edible oils.
The rise in coffee prices poses a new challenge. However, an easing of tea leaves prices gave HUL and Tata Consumer Products some respite.