When Reserve Bank of India Governor D Subbarao spoke on Tuesday about a likely moderation in demand that should help reduce pricing power of the domestic manufactured goods industry, he was bang on.
Last year, fast moving consumer goods companies took price rises of 5-10 per cent on categories such as soaps & detergents and skincare, while hair and edible oils saw price rises in excess of 10 per cent.
Categories like automobiles and consumer durables, on the other hand, saw price rises of 5-7 per cent.
While consumer-facing businesses enjoyed the cushion of strong demand last financial year, that may not be the case this year.
Companies have begun seeing a moderation in demand, resulting in lower offtake of products.
This means pricing action may moderate in the next few quarters, as companies fret about retaining customers.
Sample this: Maruti, which sells close to 100,000 units a month, reported an offtake of 87,000 units for April, a drop of 13 per cent.
Tata Motors saw sales growth in single digits and it was no different Toyota and Honda.
If FMCG companies are taken into account, the slowdown has been visible from the last quarter.
According to Shirish Pardeshi, senior FMCG analyst at Mumbai-based brokerage Anand Rathi, volume growth of companies that have reported their results so far, has been 5 to 10 per cent, against 10-15 per cent in the previous three quarters.
"General inflation, led by food, has hit the share of wallet of consumers," Pardeshi says.
"This has impacted demand."
On an average, consumers spend half of their household budget on food alone.
When food inflation is high, expenditure on food can go up to 60-70 per cent of a consumer's household budget.
This leaves little room for expenditure on allied products.
"The result is a prioritisation of expenditure," says Anand Mour, senior FMCG analyst at Mumbai-based
But are companies ready to sacrifice margins for volumes?
While FMCG companies say input cost pressures leave them no choice but to take price rises, auto companies admit margins will take a hit as pricing power comes down.
Pawan Goenka, president, Mahindra & Mahindra (automotive and farm equipment sectors), says, "There is pressure on margins because interest rates are hardening and the ability to pass on price hikes to customers also becomes a little more difficult. Internal costs can be reduced up to a certain point, but this cushioning also gets exhausted later.
"So, this year will generally be a difficult year for the auto industry in terms of margins."
Arvind Saxena, director, sales and marketing, Hyundai Motor India, says, "There is absolutely no doubt that there is pressure on margins. Raw material prices have stayed high and there are no signs of cooling off.
"The trend clearly shows that enquiries are lower than some of the previous months. The recent interest rate hike will not improve matters either."
FMCG companies say their approach of taking calibrated price rises will continue. "In the given scenario, that is the best possible option," admits Sunil Duggal, chief executive officer, Dabur India.
Agrees A Mahendran, managing director, Godrej Consumer Products: "Not everything has been passed to consumers. Firms have been cautious in their approach.
"The pass-on has been necessary when it has been impossible to absorb input cost pressures."
