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The outlook for food companies appears a bit brighter in FY12

The outlook for food companies appears a bit brighter in FY12

Consumer food companies would welcome some respite from inflation in agricultural commodity prices, given their inability to pass all of it to consumers.

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Last week, two global consumer firms Nestle SA and Groupe Danone SA reported good numbers for the March quarter, and said they expect raw material costs to remain volatile in 2011. But they also expect to hike prices to offset cost spikes.

In India, companies have been unable to fully pass on rising costs, fearing what they may do to volume growth. Food inflation has affected purchasing power and consumer sentiment.

The Nielsen Co.’s December quarter consumer confidence survey showed Indians being concerned most about rising food prices over the next six months and planning to cut on discretionary spends to deal with it.

Rising competition in the market, too, has kept a lid on price hikes. Companies have been trying to cut costs and take marginal price hikes wherever possible, or in categories with limited competition.

But that is not enough. They must hope that raw material prices retreat in fiscal 2012 (FY12), even as product prices remain constant, giving them the much needed respite.

Some recent developments suggest they have reason to be optimistic. The Food and Agriculture Organization of the United Nations’ food price index was down by 3% over February, for the first time in nine months, due to a decline in the prices of oils, fats, sugar and cereals. Prices of wheat and rice in India were steady in March, but up by 10% over the previous year.

India’s inflation data still show food prices rising, but chiefly due to the effect of fruits and vegetables than of staples. Sugar and milk prices remain subdued. Domestic tea prices, too, have softened.

A big worry in the March quarter was the sharp rise in the prices of crude palm oil. That has reversed now, with Malaysian crude palm oil down by about 14% from its high levels of February; though it is still about 35% higher over the previous year.

India’s foodgrain output is expected to rise by about 8% in FY11, according to the government’s third advance estimates. This suggests a more conducive environment for food prices to remain stable.

On 19 April, the weather bureau will release its first long-range monsoon forecast, which should set the stage for near-term expectations about the agricultural output.

The risk is that output may improve, but food prices may still increase, as seen in the past, due to structural reasons and loose monetary policy.

The outlook on costs appears more favourable compared with FY11 for food companies such as Nestle India Ltd, Britannia Industries Ltd and the foods business of Hindustan Unilever Ltd. And, if tea prices continue to remain weak, branded tea companies will benefit as well.

The March quarter results will reveal if price hikes are playing a bigger role in the sales growth of food companies. Investors will want to hear from companies their outlook on the cost front. So far, companies have managed to keep volume growth up, despite higher inflation, by keeping prices in check.

If input costs stabilize in FY12, then earnings will grow faster, assuming volume growth continues to be steady. Otherwise, they may have to consider hiking prices by far more, even at the risk of hurting volume growth a bit.

Graphic by Yogesh Kumar/Mint

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