Festive season, supply chain issues may have been contributing factors leading to higher inventory
Companies had more inventory lying with them than before relative to their sales at the end of the first half of a year marked by pandemic-related challenges.
Inventory as a percentage of sales rose to 10.03 per cent compared to 9.36 per cent in September 2019 and 9.09 per cent in September 2018. There has been a rising trend in recent years. It was 8.93 per cent in September 2017 (see chart 1).
The analysis is based on average inventory and net sales over the trailing 12 months for 326 firms with continous data over the period under consideration. Sectors such as oil, mining, metals and realty where inventory value is volatile or may be different in nature from manufactured products have been excluded.
Sectors such as capital goods, which includes things like factory machinery used to make other goods, are more likely to have suffered as companies have gone slow on making new investments, according to Pankaj Pandey, head of research at ICICI Direct. Companies which sell fast moving consumer goods (FMCG) products like soap may be less affected, he suggested.
“In FMCG, because of better demand from the rural side, the inventory levels have actually come down,” he said.
Abhimanyu Sofat, head of research, IIFL Securities said that people had faced challenges in terms of supply chain issues. Lockdowns in different parts of the country meant that getting the necessary raw materials for producing the goods or even sending goods on to the customers was challenging. Inventory levels could reflect some of this too, according to him.
The festive season may also have affected inventory levels as of the end of September, according to analysts. The festive season this year was later compared to last year which could have had an impact on the goods produced or stocked in anticipation of the same.
Automobile and automobile ancillary companies also saw a rise relative to September and March figures. Some of the sharpest increase has been for the retail sector. Inventory went up from 25.3 per cent to 40 per cent between March and September (see chart 2).
Capital goods in the form of electrical equipment saw inventory rise from 24.8 per cent to 28.5 per cent. It rose from 24.1 per cent to 30 per cent for non-electrical equipment.
The Reserve Bank of India had noted a sharp fall in capacity utilization during the lockdown in its Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the quarter April-June 2020 (Q1:2020-21), released in October. This came on the back of utilization levels which were already below 70 per cent. Low capacity uilisation generally leaves companies little incentive to add capacity by setting up new factories when existing ones aren’t being fully used. Sales in the period under consideration fell more than inventory leading to the relative rise suggesting that demand hadn’t kept pace with capacity for key sectors. Absence of private sector investment can be seen to be a dampner on growth.
“At the aggregate level, capacity utilisation (CU) fell sharply from 69.9 per cent in Q4:2019- 20 to 47.3 per cent in Q1:2020-21, as domestic economic activity was impacted severely by lockdown imposed during the quarter to contain the spread of the Covid-19 pandemic. Seasonally adjusted CU also declined to 48.2 per cent in Q1:2020-21 from 68.2 per cent in the previous quarter,” the RBI survey had said.