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Commodity cost inflation, which started to ease in August, is firming up again. With the ongoing global supply chain issues, fears of elevated inflationary pressures have resurfaced.

Prices of items that are key for consumer firms, such as copra, edible oil, palm oil, crude oil and packing material, have risen between 30% and 80% in the September quarter alone, analysts said. With no quick solution in sight to the supply-chain crisis, commodity prices are unlikely to soften soon. This puts the gross margins of fast-moving consumer goods (FMCG) firms at risk of erosion.

“Although most managements had expected commodity prices to come off over the next three months during 1QFY22 earnings calls, that scenario has not played out with inflation resurfacing again in commodity prices," analysts at Yes Securities Ltd said in a report on 27 September.

The cost pinch
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The cost pinch

“The key reasons for the same are surge in covid-19 cases (that) is disrupting raw material supplies globally, shortage of containers for logistics, packaging costs have been on the rise as prices of copper, aluminium and crude oil are moving upwards and strong demand in festive season may put pressure on companies to balance volume and price growth. All these reasons make a case for earnings downgrades for most (FMCG) names mainly on the margins front."

Of course, consumer firms have been trying to protect their gross margins with price hikes, but since it is being done in a calibrated manner, it would take some time to reflect in earnings performance.

“Companies have continued to take staggered price increases in 2QFY22 till date to tackle input cost inflation. HUL (Hindustan Unilever Ltd) took calibrated price hikes of around 7-8% till 4QFY21 and post continued inflation pressures, it executed another round of price hikes of nearly 3% in skin cleaning, laundry and tea portfolios in 1QFY22," Nirmal Bang Securities analysts said in a report. It added that while HUL has not seen further inflationary pressure on a sequential basis in 2QFY22, it seems to have taken further pricing action.

That said, given the expensive valuations of consumer-focused stocks, despite these measures, stocks could see a near-term underperformance, analysts caution.

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