Business - India Inc unable to cash in on input rate fall

Ranju Sarkar & Ishita Ayan Dutt

Prices of many commodities have come down by 50-60 per cent over the past few months, but most Indian companies have not been able to take advantage of the same.


That’s because people are sitting with a lot of stocks at old prices, which includes raw material and work-in-progress. Till the time these stocks are exhausted, the benefit won't start reflecting in the financial statements, feel experts.

"When commodity prices were high, many manufacturers got into agreements for three-to-six months, and so will have to keep buying at those rates for the period," said Probal Banerji, group chief financial officer, Hinduja Group.

Take steel, for instance. While international prices have fallen sharply for many grades of steel, domestic producers have not reduced prices to that extent, Banerji said. "It will take six to nine months before the benefits start kicking in," he added.

In normal course, one expects a drop in raw material prices to provide relief to manufacturers. The liquidity crunch and the demand slowdown have meant lower offtake from buyers, who are deferring their purchases in view of falling prices. "Working capital has dried up, banks are not lending and the cost of credit has gone up. The rupee has moved up while commodity prices crashed," said Arvind Parakh, director for strategy and business development, Jindal Stainless.

"Companies are holding inventories. Prices have crashed too fast for companies to react and plan. They are taking a hit on raw materials," said Parakh. Most export orders have been deferred as demand slowed down in the West.

Experts say that inventories have been piling up and it’s only now that companies are starting to reduce production. The steel industry typically carries an inventory level of one million tonnes of steel or seven days stock. This has now increased to three weeks, said Seshagiri Rao, director finance, JSW Steel.

When commodity prices were going up, traders took positions in them expecting the rates to further increase. Today, many of these traders are liquidating their stocks, leading to distress deals. "There was an inventory build-up, which is now coming down," said Arun Karambelkar, executive vice president, procurement, HCC.

Car-makers and auto part-makers say prices of auto-grade steel has not fallen, but they will benefit from fall in prices of aluminium and copper. But component-makers say the rupee's depreciation is negating the gain. "The recent hike was to offset the rising input costs since April," said a Maruti official.

In many cases, the administered prices have not come down. For instance, oil companies have not yet passed on the benefit, except in case of jet fuel. Whereas in the case of iron ore, the National Mineral Development Corporation (NMDC) actually increased the iron ore prices in October by Rs 190 per tonne, with retrospective effect from April 1. Bigger companies are using their might to defer offtake of raw materials and adjust the prices, but smaller firms may find it difficult to do the same.