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Higher commodity costs to weigh on profit margins of consumer firms in near term

A sharp increase in raw material prices in among the key risks to profit margins of consumer firms from a near-term perspective. (Photo: Mint)Premium
A sharp increase in raw material prices in among the key risks to profit margins of consumer firms from a near-term perspective. (Photo: Mint)

  • Note that consumer firms are on the recovery path and many companies should see further improvement in sales in the March quarter. It is also expected that price hikes by consumer companies will offset some of the inflationary pressure

MUMBAI: A sharp increase in raw material prices in among the key risks to profit margins of consumer firms from a near-term perspective. Tea prices have been firm, and those of crude as well. Palm oil prices have also risen. Crude derivatives are among raw materials used by many consumer firms, plus higher crude prices have a bearing on packaging material as well.

In their February review report on 10 March, analysts from Kotak Institutional Equities said, “On RM front, we witnessed (1) a sharp price increase in milk, (2) further increase in prices of most oil commodities, and (3) further inflationary pressure in VAM and monomers. Broad-based inflation would weigh on gross margins of most consumer companies in the near term." VAM is short for vinyl acetate monomer.

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So which companies are likely to be affected? Kotak adds, “Higher prices for monomers and VAM are negative for paint companies and Pidilite Industries Ltd. PFAD inflation to hurt Hindustan Unilever Ltd, Godrej Consumer Products Ltd and Jyothi Labs. Inflation in Copra, and LLP would weigh on edible oil and hair oil categories (Marico Ltd). Increase in milk prices hurts Nestle India Ltd and Britannia Industries Ltd." PFAD refers to palm fatty acid distillate and LLP is liquid paraffin oil.

Note that consumer firms are on the recovery path and many companies should see further improvement in sales in the March quarter. It is also expected that price hikes by consumer companies will offset some of the inflationary pressure. Motilal Oswal Financial Services Ltd’s report dated 9 March points out, “Price hikes taken by most companies earlier in the year as well as during the quarter, combined with continued stringent cost-control measures, should offer some relief from the sequential inflationary trends seen in most commodities."

Among staples, Motilal Oswal expects Marico to likely be the most affected, subject to inventory levels. “Increase in copra costs year-on-year as well as quarter-on-quarter is expected to increase material costs, perhaps with a lag on account of inventory. The crude price increase could also affect packaging costs for Parachute and Saffola. Margin is likely to get affected as no major price increases were taken by the company other than a 3-5% increase in Feb’21 on its Saffola edible oils portfolio."

In the December quarter, Marico’s consolidated earnings before interest, tax, depreciation and amortization (Ebitda) margin fell by 99 basis points y-o-y to 19.5%, although the measure was flattish sequentially. One basis point is a hundredth of a percentage point.

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