High food prices hurt consumer product manufacturers

High food prices hurt consumer product manufacturers

With spiralling food prices, the wallet share of consumers is expected to tilt towards food products and away from consumer products. Also, higher food prices result in more working capital for retailers.

Also See Rising Food Inflation (Graphics)

This would lead to some de-socking by them. We expect that this might affect new products and slow-moving ones. This trend would drive revenue for companies with a greater proportion of small stock-keeping units. It may also compel companies to raise retail margins and incentives.

There were a few launches and relaunches in November. ITC Ltd launched Classis Verve at Rs98 for a pack of 20 cigarettes. Nestle India Ltd launched pasta under the brand name Maggi Pazzta. GlaxoSmithKline Consumer Healthcare Ltd (GSK) has introduced Horlicks Asha in the southern markets to tap low-end consumers.

The Tata group launched soft drinks under the brand name Tion and a water purifier brand-named Swach. This would provide competition to Pureit of Hindustan Unilever Ltd (HUL). Procter and Gamble upped the ante in the detergent war by launching Tide- Naturals. HUL, in an attempt to arrest the fall in its market share, relaunched Breeze. Cadbury relaunched all its chocolates in India.

Also with changes in royalty guidelines, the cap on royalties to multi-national companies may rise.

Earlier, royalty was capped at 5% of domestic sales and 8% of exports. Now, with no cap on royalties, such payments to parent companies would rise. This may help introduce stronger brands in India and help increase research inputs from parents. HUL has already indicated raising trademark royalties.

With the lower base of November, prices of most raw materials have been rising. However, some such as copra and soda ash continue to be sold at below their November 2008 prices—by 26% and 13%, respectively. Liquid paraffin and linear alkyl benzene prices are 48% and 12% lower, respectively. The price of palm oil has shot up 58% year-on-year. Prices of most agricultural products have climbed more than 30%.

Raw material prices impact consumer companies, the month-over-month drop in coffee prices would benefit Nestle and HUL. Higher prices of agricultural products are expected to hit Britannia Industries Ltd. Lower prices of crude oil derivatives are expected to help personal care companies HUL, Emami Ltd, Dabur India Ltd and Marico Ltd. Higher packaging material costs are expected to affect all companies.

Keeping the above in mind, some stocks that we rate ITC, Dabur, Colgate-Palmolive (India) Ltd, Marico, Emami, Godrej Consumer Products Ltd, and GSK as buys, where recommend sell on HUL, Nestle and Britannia.