India Inc lifts lid on prices

After absorbing costs in 2004, corporates are now passing the burden to consumers.

Come February and Electrolux Kelvinator, the Delhi-based white goods manufacturer, plans to raise the prices of its microwave ovens by 3-5 per cent.

The price of the company's air-conditioners, too, will be jacked up 5-7 per cent. "The market will have to pay for what it is taking from us," declares Rajeev Karwal, managing director and chief executive officer, Electrolux Kelvinator.

The hikes are coming after the company increased the prices of refrigerators and washing machines twice "" between 5 per cent and 8 per cent "" in the last four months.

Electrolux Kelvinator has reasons to act on the prices front. "The prices of not only steel but of other commodities like styrine and polypropylene have gone up by 50 per cent," says Karwal.

Another executive at a leading consumer electronics company claims its refrigerator prices will not remain frozen either.

Clearly, with costs on the upswing and company margins under pressure, the bottomline is that the consumer will have to pay more in 2005.

If for the past three years, to chase volumes, manufacturers offered products at mouthwatering prices, now, they are only too content to pass on the burden.

This comes in the wake of rising international prices, which has seen Indian manufacturers welcome the new year with a spate of price hikes. Earlier this month, the state-owned Steel Authority of India, Essar Steel, and Jindal Iron and Steel raised steel prices by Rs 500 per tonne.

Then, automobile majors Maruti Udyog, Hyundai Motor India, Ford Motor India and General Motors India revved up prices by between Rs 5,000 and Rs 20,000 on various car models. Even Tata Motors and Skoda Auto are gearing up for hikes this quarter.

Last year, with the fizz running out of the "paanch rupaiya" ads, beverage makers PepsiCo and Coca-Cola increased prices.

With base metal prices on the London Metal Exchange touching multi-year highs in the end of 2004, aluminium majors Hindalco Industries and National Aluminium Company recently raised primary aluminium prices by Rs 2,000 a tonne.

Cement prices were up last week by between 10 per cent and 20 per cent per bag in major markets.

Why are companies jacking up prices? With the relentless rise in input costs, companies are being forced to pass on the burden to consumers in 2005.

Even the Rs 70,000 crore fast-moving consumer goods industry is widely expected to raise prices this year, as soaring input costs are washing away profits.

Last year, Hindustan Lever and Procter & Gamble slashed the prices of shampoos and detergents in an attempt to gain market share.

Others like Henkel Spic followed. However, Nirma increased prices in August 2004. A month ago, Nestle raised the price of Maggi noodles by Re 1. And if Dabur India has kept a lid on prices, it is because its main production facility is based in Uttaranchal, a tax haven.

Then there is the issue of supply and demand. While a shortage of raw materials is raising input costs, in some cases robust demand is seeing companies increase prices of finished goods without affecting sales volumes.

Analysts point out that an upsurge in consumption, especially in the construction and the automobile industry, has resulted in intermediate input industries -- metals, cement and paints "" jacking up prices.

The rise in steel prices has been prompted by an acute shortage of raw materials and sharply rising demand for steel, especially from China. The cost of all steel industry inputs has gone up by 60 per cent to 200 per cent in the past year.

Coking coal alone is now being procured at $100-$120 per tonne, double the $55-$70 per tonne last year. Iron ore has been contracted at rates that are 20-25 per cent higher.

Says Bhavin Chedda, a steel analyst at the brokerage firm, Pioneer Intermediaries, "Input costs have been rising for the past 18 months and are expected to rise further in 2005."

He adds that margins, so far good, may come under slight pressure towards the end of 2005 if steel companies cannot raise prices.

The increase in steel prices has had a fallout on the downstream automobile industry. This, coupled with the Euro III norms compliance is driving up costs for automobile companies, which is unlikely to impact volumes in 2005.

Still, not everybody can push up prices.

Petroleum product prices have increased, thanks to higher crude prices. So paint companies have been badly hit, as the input costs of crude derivatives, which account for 60 per cent of input costs, have gone up by over 5 per cent from May 2004.

Besides, the price of titanium dioxide, which accounts for the other 40 per cent of input costs, is also expected to go up with rising demand.

Asian Paints and Goodlass Nerolac raised prices twice in 2004 by about 4 per cent. But MR Rajaram, chief financial officer and executive director, ICI, says that as prices were raised, sales dropped by about 3 per cent.

This forced the industry to cut prices by 3 per cent in December. Of late, there has been a reversal in the trend, with petroleum and petroleum product prices coming down. If this continues, paint prices could come down in the near future, he says.

As for edibles, biscuit prices too rose last year, but glucose biscuit prices were rolled back.

Explains Mayank Shah, brand manager at Parle Products: "We were forced to bring prices back to the original level because of consumer resistance. We have no immediate plans to hike prices though input costs are putting pressure on the bottomline."

Despite this, confectionery makers, with the low unit cost of their products, have had to stay put.

For them, sugar prices have skyrocketed to 30-year highs, rising by 37 per cent over the last three months from Rs 16 per kilogram to Rs 22. This is attributed largely to hoarding by traders and low production.

Says Ravi Naware, chief executive officer of ITC's food division: "Unfortunately, confectionery prices are fixed and these price points cannot be frequently altered. If a product is priced at 50 paise, it cannot be made 55 paise. The market is not elastic enough to absorb any price hike. Companies will have to take a hit in their bottomlines."

But in most cases, the consumer will have to shell out more.