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After reporting suppressed growth in sales in the last few quarters, Indian companies hope it to improve in the coming months. However, a rise in cost of inputs could spoil the party. A sudden spurt in the price of metals could be the Achilles'' Heel
If the findings of Business Confidence Index of ET-NCAER are anything to go by, then India Inc is set on a recovery path in the next six months. About 70% of respondents think that sales are going to increase in next six months compared to 56% respondents in the last round of survey. Apart from consumer durables, a higher percentage of companies from other sectors expect sales volume and revenue to rise compared to last round. The greatest revival of fortunes is witnessed by capital goods and intermediate goods sectors. Close to 80% of respondents in capital goods expect sales to rise compared to a 54% hike in last round. As much as two-thirds of respondents think that sales would rise in intermediate sector vis-Ă -vis 47% in last round of survey.
It must be noted that the current bearish phase was the result of downturn in capital goods and intermediate goods sectors. Capital goods and intermediate goods indicate the level of investment. A better sentiment in these two sectors indicates that more funds are being pumped into investment projects, which act as a fuel for growth. Even services companies are caught by recovery fever, as 64% respondents expect sales to rise compared to 53% in last survey.
However, a slim percentage of respondents expect exports to rise. This shows that global recession is far from over and export-oriented sectors will continue to grapple with slowdown. Only 31% respondents expect exports to rise compared to 34% in last round of survey. The percentage of respondents, who expect profit to rise, remained constant at 43%.
The outlook took severe beating in case of services, where only 30% of respondents expect profit to rise compared to 45% in last round. This might be due to slowdown in hospitality industry as tourist footfall has fallen. It must be noted that lesser percentage of respondents expect profit to increase compared to sales, which shows that bottom line growth might take some more time to recover. Worse still, only 12% respondents expect profit to rise by more than 5%. This means that majority of respondents expect profit to grow at low single digits, which for all practical purposes means no growth.
The culprit behind average profit outlook is input costs. Around 55% of respondents expect cost of raw material to rise compared to 42% in last round. Similarly, the percentage of respondents expecting cost of electricity to increase has gone up to 58% compared to 38% in last round. Around 35% respondents expect cost of labour to rise compared to 44% in last round. In nutshell, cost of inputs is set to rise.
This is evident from rising prices of metals too. Corporates should not be overjoyed by rising sales, as rising input costs lurk on recovery path. Only 32% respondents expect that they will increase their product prices. The fact that fewer corporates expect rise in product prices explains poor profit outlook. Perhaps, companies do not want to miss out on recovery even if it cost them a buck or two.
Conclusion: As already said, there are signs of recovery as far as sales are concerned. However, rising input cost can act as a spoilsport in short-medium term. Particularly, rising metal prices can give nightmares to companies. The old wisdom of long term cycles in metal prices do not seem to hold any water in modern world as metal prices have shown wild fluctuations. Capital Goods sector has the best sales forecast of all sectors. This shows that infrastructure is a long-term story in India, and investors must keep a part of their portfolio in infrastructure related companies.
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