Inflationary concerns

In the last round of business confidence index survey, it could be concluded that the overall picture of India Inc is rosy, but rising inflation is lurking large. The need of the hour is to focus on how to overcome the inflationary pressures.
This is evident from the results of latest round of BCI survey as the proportion of respondents expecting increase in profits by more than 5% has come down to 17.4% from 26.5% in the last round of survey conducted just 3-4 months back. Even more worrying is that the percentage of respondents expecting net profit to rise has fallen across all industries.
The sales and production outlook has marginally changed, which shows that the hit on the bottom line is due to rising costs. It is interesting to note that the sales outlook of intermediate goods was the worst hit in the latest round of survey.
However, it was this very category, which had shown the maximum improvement in sales outlook in last round of survey. An expected slowdown in intermediate goods indicates that there is a possibility of corporate growth slowing down. Companies in consumer durable and services categories have also reported weak sales forecast.
It is surprising that companies in consumer non-durable sector are best performing in terms of proportion of respondents expecting sales to register growth of more than 5% in the next six months. The reason behind this is FMCG companies have seen a rise in their sales volumes till now and companies like Hindustan Unilever have also said they do not expect the unit sales and rupee sales to come down going forward.
The production forecast was almost flat. Across categories, consumer non-durables showed the maximum improvement.
This is partly because last time the forecast was low due to inventory pile up. It seems that those inventories have been cleared up and the latest round of survey shows that proportion of respondents expecting sales and production to rise at a higher rate is almost equal, which shows normalcy returning to the sector. The other sector to show improvement in production forecast is capital goods and it also shows that the investment demand in the economy is still robust. Companies in intermediate goods sector reported weak production forecast much on the similar lines as sales forecast.
Inflationary concerns are primarily due to rising cost of raw material. This becomes evident from the fact that percentage of respondents witnessing more than 5% increase in cost of raw material during last three months increased to around 25% from 8% in last survey.
Rising metal prices resulted in substantial increase in number of respondents witnessing an increase in cost of raw material in consumer durables, intermediate goods and capital goods categories. However, cost of raw material is not expected to rise at the similar pace as it has risen during last three months as only 10% of respondents said prices will rise by more than 5% over next six months as compared to 25% who said that prices actually rose during last three months.

The news for the final customer is not that bad as percentage of respondents saying that they would increase the ex-factory price by more than 5% over the course of next six months stands at only 4.8%. And, this perhaps, clearly explains why so many companies are expecting their bottom line growth to slow down as input prices are rising but the prices of finished products are not changing much.

The companies in services and consumer durables are expected to be laggards as proportion of respondents expecting sales, production and profits to rise by more than 5% is least in case of such companies. There are confusing signs for the economy as a whole as the forecast of intermediate goods has weakened.

But, the percentage of capital goods companies expecting performance on sales and profits to rise is on the higher side, which means that investment is yet to slow down. We think that the economy will still grow at healthy rate as evident from capital goods forecast. And, even after weakening the proportion of respondents in intermediate goods category expecting sales and production to rise is still close to the long-term average.