Industry reaps cheaper inputs

Up To 50% Drop Lowers Implementation Cost, Making Investment & Buyouts Cheaper

THE prices of major input commodities, including steel, aluminum and crude oil, have almost halved over the last six months, lowering cost of implementation of projects and making it easier for companies to go ahead with their investment plans.
    Industries with high variable costs are also expected to improve their bottomlines on account of the fall in input prices.
    The going is expected to get better with prices of industrial inputs expected to fall further in the coming months and enter the negative territory. According to chief statistician of India Pronab Sen, prices of industrial inputs were likely to drop 3% in a few months. Interestingly, Dr Sen was the first economist who suggested that inflation will turn negative by March-end.
    Speaking to ET, Dr Sen pointed out that with the cost of steel, aluminium and other commodities softening, the cost of implementation of new projects is dropping and the government will be able to achieve targets in infrastructure development with lower outlays.
    "With inflation and input prices coming down rapidly, industries that have high variable costs compared to fixed costs and are in non-cyclical sectors stand to benefit most," Goldman Sachs' Tushar Poddar said in a recent note. Sectors with high variable costs like refineries, steel, non-ferrous metals, consumer durables and fertilisers have more flexibility in reducing cost structures in the short term than those with higher fixed costs like the services sector.
    Many companies that have been sitting on piles of inventory in the last quarter and could not benefit from the drop in commodity prices are looking forward to better results in this quarter. K Ravi Kumar, chairman and managing director of Bhel, which is sitting on an order book of more than Rs 1 lakh crore says, "Margins in third quarter have been lower on account of inventory costs and will pick up this quarter on the back of easing prices of inputs."
    Data released by the government so far has not shown a marked slowdown in investment. The trade data and gross domestic production data suggest that the investments remain healthy, but moderate, even in the face of economic slowdown. Project imports grew a whopping 170% in dollar terms in January, showing that India Inc has not stopped investing despite the downturn and higher cost of capital.
    According to December quarter GDP data released by the Central Statistical Organisation last week, gross fixed capital formation continued to be in excess of 33.4% of GDP at current market prices in October-December 2008.
    The collapse of commodity prices has helped slow the pace of growth of the country's trade deficit, bringing it below $100 billion for April 2008-January 2009. "The fall in prices will obviously adversely impact the commodity-exporting countries while the commodityimporting countries will be in a better position. India stands to gain from the scenario," credit rating agency Crisil principal economist DK Joshi said.
    Indian companies which have been looking at acquisitions have also benefitted from the meltdown. Hyderabadbased infrastructure firm GMR chairman GM Rao said, "Towards Februaryend, we acquired 33.5% in Canada's Homeland Energy Group, the parent firm of Homeland Mining & Energy, for $30 million — $100 million lower than the expected price. While buying Indonesian coal mining company Barasentosa Lestari PT, we had to pay only $80 million, much lower than the negotiated price of $120 million."
    anto.antony@timesgroup.com