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Inflation Takes its Toll

When the quarterly results begin to get announced this Friday, the focus will be on operating margins. India Inc is reeling under inflation and high interest rates.

A year ago, the story was totally different. We were looking at double-digit GDP growth, low inflation, a bull market, low interest rates, plans for massive investment in infrastructure and a stable political regime. Everything has changed.

The market has tanked by over 35% from its January 2008 peak of 21,207. In around 6 months it has fallen to 13,000 levels. Instead of growth, it is inflation which is at double digits and shows no signs of abating. The RBI is tightening liquidity with various monetary instruments. The government will have to scale down its GDP numbers to sub-8% levels. This week the focus will be on the political front. With the SP backing the N-deal, chances of early elections have reduced. Though surprises cannot be ruled out.

Rising inflation, slowing growth and higher interest rates will hit sectors such as steel, automobiles, realty, consumer durables and financial services. Amit Mitra, Secretary General, Federation of Indian Chambers of Commerce and Industry (Ficci), was reported in the press as saying that “if the phase of weak growth prolongs, then some of the companies may be forced to even close down a few production facilities.” He said that the best response is to focus on increasing productivity, cutting costs and making the organisation leaner.

The steel industry is reeling under a sharp rise in the cost of raw materials. Steel prices have gone up by 45% in the last one year. Since steel is a major raw material for most manufacturing industries, high prices will only contribute to the inflationary trend. The auto industry will also be hit by rising raw material costs such as steel, aluminium, plastic and rubber. Not only will these prices depress their margins but the rising interest rates too will have a negative impact on demand. So the industry will not only have to take care of lower operating margins but also survive in the low demand scenario. Cement too has taken a hit. Shailendra Chouksi, Director, J K Lakshmi Cement, was quoted in the press as saying that they are working on much lower operating margins and as compared to last year, they are spending Rs 20-25 more per bag.

All eyes will be on this financial year's first-quarter results, starting July 11. Everyone is watching to see how India Inc is coping with slowing growth momentum and rising costs. Look out for operating margins.