The Hindu Business Line : Capital goods: New moves on procurement

Capital goods companies have begun to feel the heat from spiralling commodity prices. The average operating profit margins of companies in this space have fallen a good two percentage points, to about 16 per cent, in the June quarter. Raw material costs as a percentage of sales moved up to 49 per cent from 47 per cent, in spite of a 27 per cent dip in sales. But not all capital goods companies have come to harm because of this. Some have managed to fight their way out of i nput price inflation to better margins.

Companies such as Praj Industries, Thermax and Elecon Engineering, with a significant presence in both project and product business, have kept margins intact by increasing focus on the high-margin project business. BHEL’s raw material cost as a percentage of sales remained flat in the June quarter on the back of a series of measures to contain commodity costs.

Given the high volume of business it provides to vendors, BHEL has managed to receive materials such as steel at prices originally contracted with suppliers. It has also resorted to advance procurement before final award of orders, to lock into favourable prices. Steel procurement on an experimental basis from China at prices as much as 20 per cent lower than the domestic rates has also been attempted.

Smaller companies such as Indotech Transformers have resorted to holding higher inventory of steel and copper at the bidding stage itself, improving their margins. However, this strategy could backfire when commodity prices suddenly reverse.

Railway suppliers gain

On that count, companies that supply to either the Indian Railways (Texmaco and Titagarh Wagons) or the various PSUs are in a sweet spot. The Indian Railways supplies a significant portion of raw materials as ‘free supply’ items to its various manufacturers, providing them relief on the cost front. Orders procured from PSUs, on the other hand, have price escalation clauses in place.

Among other companies that stand out in raw material management are steel pipe-makers PSL and Welspun Gujarat. While Welspun Gujarat has integrated backward integration into steel plate manufacture, PSL has adopted a completely different strategy. It covers 100 per cent of its steel requirement within the shortest possible time after the receipt of any order.

And since the orders procured are priced after accounting for the prevailing steel price, this strategy gives PSL sufficient headroom to maintain its margins.

Large-sized orders are procured from multiple sources, to reduce the risk of escalation in price over the execution period. But since this also entails taking delivery of steel, the strategy loads the company’s balance sheet with higher inventory carrying cost.

More Stories on : Engineering | Engineering

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page