Economy

How companies are tackling shrinking margins

Preeti Mehra New Delhi | Updated on April 28, 2011 Published on April 28, 2011

The squeeze on margins thanks to surging input costs and zooming interest rates is forcing companies to work overtime to shore up their bottom lines.

Across sectors the belt tightening is being achieved through focussing on supply chain efficiencies, shifting to long-term raw material sourcing and pruning consumer promotions.

BHEL, for instance, has managed to keep material costs in 2010-11 at the previous financial year's range of around 59-60 per cent. This, despite a sharp perking up in material costs over the last few months. “We have begun working extra hard on material cost reductions and initiated integrated operation improvement initiatives like design-to-costs, and lean manufacturing. Coupled with better buying practices and long-term contracts with some material suppliers have helped achieve lower material consumption,” BHEL's Chief, Mr B.P. Rao, said while elaborating on the state-owned firm's cost curb exercise.

Punj Lloyd too, admitted that it is walking the tightrope to sustain profitability without compromising on quality. To overcome high interest rates, new controlling measures have been deployed for increasing efficiency in finance: A better float management system, centralised payment system, mix of different loan products and a combination of rupee and foreign currency funding has been put in place for the Group as a whole. These measures have resulted in cost rationalisation and optimised efficiency, said Mr Atul Punj, Chairman, Punj Lloyd Group.

While explaining that price fluctuation in input costs do have an impact on the company's operations, he said that to a large extent the effect is mitigated by estimating cost contingency at the time of bidding and controlling individual cost fluctuations by drawing long-term vendor agreements. Reducing project completion time was another strategy.

What has helped Nestle India is a mix of cost rationalisation and discontinuing free goods promotions. The consumer products major recently reported an EBITDA growth of 26.7 per cent year-on-year during the latest quarter (Q1), aided by margin expansion. At the operating front, its gross margin expanded by 100 basis points on account of improved product/channel mix and discontinuing of free goods promotions, despite higher cost inflation in milk and sugar prices, pointed out an Angel Broking analysis.

Intermediates sector players such as tyre cord manufacturer SRF Ltd said that in its low margins business improving efficiency is a continuous process. “We plan ahead. There is no knee jerk reaction,” said CFO Mr Rajendra Prasad pointing out that generally in the B2B segment it is possible to pass on some rising input costs to customers.

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Published on April 28, 2011
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