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Time for a price cut?

Time for a price cut?

Despite a call from the FM, industry leaders say cutting production is a better way to deal with recession.

Money Wise: Chopping prices may prevent a further demand slump
Money Wise
The country’s finance minister and india inc. are singing different tunes. While P. Chidambaram wants industries across segments to reduce prices of goods to boost flagging demand, most industries feel the right way would be to cut production. Who’s right then? Sample this: Honda Motors sold 98 Honda Civic Hybrid cars in a single day in November when it reduced the price of the car by Rs 8 lakh. This was more than the total number of Hybrids sold by Honda throughout the rest of the year. The price cut came during a financial crisis when all major auto makers were talking of a slowdown. India Inc. by and large, however, feels a price cut is not possible in the current situation.

An analyst with a stock broking firm, who did not want to be named, argued that if despite the fall in crude prices over the last four months, the government has not reduced petrol and diesel rates, then companies also have a right to refuse a reduction in prices. As the financial performance of consumer related industries like real estate and automobiles show, profit margins have come down in the September quarter compared to the corresponding quarter in 2007 (see Fall in Profit). The fall in profitability has been due to three factors— high interest cost, high raw material prices and lower other income.

An analysis by stock broking firm Emkay Global Financial Services for the September quarter shows that the worst affected sectors were cement, real estate and automobiles. “Since real estate has slowed down, the demand for cement has remained low,” says Ajay Parmar, Head (Research), Emkay Global Financial Services. The Emkay analysis shows that the net profit of cement companies declined by 17.9 per cent during the September quarter compared to last year. Real Estate companies showed a 5 per cent dip in net profit and the figure for automobiles was 4 per cent.

Broking firm India Infoline expects the net profit of NSE 50-share index Nifty to be lower by 19 per cent in the second half of the current financial year compared to the first half.

It’s perhaps this gloomy prediction which has led some firms to heed Chidambaram’s call and go in for price cuts. Royal Palms, developing projects in the Western Suburbs of Mumbai, has announced a 21 per cent discount on properties. “There has been a 10 to 15 per cent reduction in the rentals in the last three months,” says Shubhranshu Pani, Managing Director (Retail), Jones Lang LaSalle Meghraj. However, he adds that the price cuts haven’t resulted in a boom in sales—clearly showing that despite the drop in prices, there is not enough demand for properties.

Why is this happening? According to experts, this is because of low confidence among buyers and the assumption that interest rates may be cut further. “Existing concerns over financing will continue to be a worry even for the four-wheeler industry”, says a Kotak Securities report that followed the launch of Maruti Suzuki’s A-Star.

Supply creates its own demand, but in the current scenario there is enough supply but little demand. It’s perhaps time to look for that magic wand.