Despite increasing volumes, India Inc loses pricing power

Last Updated: Fri, Dec 06, 2013 05:16 hrs

Even as companies have sustained growth in volumes in the past three quarters, their pricing power has fallen further in the quarter ended September, show Nifty data.

A break-up of sales growth for the Nifty 50 companies into volume and realisation shows steady growth trend for volumes, but a mixed trend for realisations in the third & fourth quarter of financial year 2013 and the first quarter of financial year 2014.

Volumes have grown for Infosys, ACC, Ambuja Cements and Hero MotoCorp since the quarter ended December 2012. Hero MotoCorp, which saw volume growth dip in the past four quarters, saw the trend reverse with six per cent year-on-year growth driven by higher rural demand; Ambuja Cements witnessed a similar trend reversal with a two per cent growth after seeing volume shrink for three consecutive quarters.

Realisations at constant currencies (eliminating the effect of exchange rate fluctuations) of information technology (IT) companies were largely flat. A weak rupee against the dollar pushed up realisations for manufacturing companies such as Grasim, while cement and commodity companies (such as steel & natural resources) saw realisations fall.

In contrast, a few companies such as ITC continued to enjoy strong pricing power. Analyst estimates suggest a four per cent fall in cigarette volumes was more than offset by a 15 per cent gain in realisations.

Asian Paints saw another quarter of double-digit volume growth and increased its market share (eating into the share of unorganised players). While realisation for the paint maker grew four per cent in the September quarter, volumes have grown 10-13 per cent in recent quarters. Consumer products maker Hindustan Unilever also saw an increase in volumes.

Telecom companies have also seen some increase in realisations.

Manish Sonthalia, senior vice-president and head, equities, portfolio management service, Motilal Oswal Asset Management, said, "Rupee depreciation and volumes growth helped companies deliver better numbers in the September quarter. We expect the second half (six months ending March 2014) to be better than the first, given the rising rural incomes and the consequent multiplier effect."

While a weak rupee aided realisations for some companies, higher export demand aided volume growth for most. Demand rise across the US and Europe and the banking and financial sectors increased volumes for IT companies. Management commentaries remained positive for most companies, though the December quarter is seasonally weak for the IT sector and could see some pressure on margins due to fewer working days.

Big metal companies also saw volumes grow in the September quarter. Volume growth both domestically (driven by capacity expansion) and internationally led to an overall 6.7 per cent rise year-on-year for Tata Steel. However, realisations for the country's largest steel maker fell 7.8 per cent because of lower prices even as a weak rupee increased realisations from the international business. Consequently, dollar realisations fell.

Higher exports from Chhattisgarh fuelled NMDC's volume growth of 10.2 per cent in the September quarter. Analysts said the company could maintain this level of volume growth in the second half as well. However, realisations fell 14 per cent as e-auction prices fell and some states cut prices. Said Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities, "Export volumes of several companies rose surprisingly in the second quarter of FY14, particularly in the automobiles and steel sectors. However, some of the exports could simply be a one-time opportunity and we would watch for the sustainability of export volumes." He said steel companies would eventually came back to selling in the domestic market once the supply-demand balance improves.

Most cement companies saw higher volume growth in the September quarter though their performance was far from satisfactory as demand remains weak. The volume gains, however, were undone by weak realisations, leading to low profits and margins. Most companies' managements hinted at a weaker October and early November, indicating that sustained demand recovery is still away.

The trend in automobiles sector was mixed. While Tata Motors saw a 32.5 per cent fall in domestic volumes, a 31.6 per cent jump in Jaguar-Land Rover (JLR)'s volumes boosted revenue. The company also benefited from realisation gains of 5.3 per cent and 6.6 per cent in the domestic and JLR businesses (which contributes a large chunk to Tata Motors' top line), respectively.

Hero MotoCorp saw volume and realisation gains of six per cent and four per cent, respectively on demand from rural areas (due to a strong monsoon) and the festive season.

Mahindra & Mahindra witnessed its worst volume and realisation performance since the June 2012 quarter as the company struggled to grow its utility vehicle (UV) business. Higher tractor sales could not make good for the weak UV performance.

Maruti's volumes grew 19.6 per cent, largely driven by a lower base as labour strikes last year had hit production. The realisation gains of six per cent is commendable, given higher discounts and lower demand for diesel vehicles.

Bajaj Auto witnessed a third straight quarter of volume declines at 8.4 per cent in September the quarter because of weak demand and increasing competition from Hero and Honda. Realisations growth was the highest for Bajaj since the June 2012 quarter and was driven by higher export realisations as the rupee fell.

Telecom operator Bharti Airtel maintained its growth trend in average minutes of use at 4.8 per cent, while average rate a minute grew 3.1 per cent. The company management indicated prices were likely to remain stable. While voice volumes are expected to rise slowly, data volumes would continue to grow briskly.

Coal India's realisations fell 1.4 per cent because of lower e-auction prices and an inferior product mix. The company, however, posted a good volume growth of 7.2 per cent on account of better availability of rakes and a 10 per cent output growth. NTPC's realisation was up 6.5 per cent,  driven by higher fuel costs. The company's generation volumes grew 1.5 per cent as demand remained subdued.

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