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Tuesday, May 26, 2009

Fall in input cost helps cos improve margins

Raw Material Costs Relative To Net Sales Drop 6% To 24.8% For 1,500 Firms During March Quarter

A LARGE number of Indian companies managed to beat sluggish demand conditions to post higher profit margins in the fourth quarter of past fiscal, helped by a pronounced fall in raw material prices. A study conducted by ETIG, which analysed the financial results of 1,500 companies for the March quarter, found that input costs relative to net sales dropped by 6% to 24.8% during the period from yearago levels. The drop has been more pronounced over the past two quarters as the figure for the September 2008 quarter was 32%.
    How this has effected the toplines or bottomlines of companies is critical. Take the case of ITC. Raw material costs accounted for 40% of the cigarette-maker's total income in the March quarter of 2009, compared with the figure of 46% in the year ago period. Consequently, operating profit margins climbed by a handy 4.5% to 33%. Net profit too gained 2.3% to 20% of the total income.
    This is pretty much the case also with India's largest fast-moving consumer goods (FMCG) company Hindustan Unilever (HUL). Raw material cost for the company dropped from 53.3% of its net sales in the March quarter last year to 51.7% in the same quarter this year.
    "Drop in raw material prices during the March quarter has helped in improving our operating profit margins," said HUL's chief financial officer D Sundaram recently, while announcing the company's financial results.
    Pharma companies too benefited from a fall in input prices. For Cipla, raw material cost as a percentage of net sales decreased by nearly 7% during the March quarter, largely on account of favourable exchange rates and changes in its product mix. Of course, the sharp fall in crude oil prices from $147 per barrel to less than $40 during the period also helped these companies.
    JSW Steel's raw material costs as a percent to net sales increased to 74% from 54% a year ago. "We have had an inventory pile up over the past two quarters. Though sales realisations have dropped, that has been partly offset by the fall in raw material prices," said company's joint managing director Seshagiri Rao.
RAW FACTS
ITC's raw material costs accounted for 40% of the total income in the March quarter of 2009, compared to 46% in the year-ago period
Cipla's input cost as a percentage of net sales decreased by 7% in March quarter
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