Relief for FMCG cos as input prices ease
3 min read 15 Jul 2022, 11:47 PM ISTInflationary pressures easing as commodity prices cool, say analysts.
PremiumNEW DELHI : Cooling commodity prices are expected to ease the pressure on packaged consumer goods companies, which have taken a series of price hikes to protect margins, company executives and industry analysts said, even though consumers will have to wait longer for relief.
In June, makers of soaps, detergents, toothpaste, floor cleaners, noodles, confectionery, breakfast and shampoos raised prices. On the other hand, some edible oil firms reduced prices after the government nudged them to do so. High inflation has buffeted margins at fast-moving consumer goods (FMCG) companies for several quarters until they started cooling in late June.
“We will see stable prices if the costs of inputs do not increase. This will result in higher demand and aid volume growth," said Mayank Shah, senior category head at Parle Products, the maker of Parle G and Hide & Seek biscuits.
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Inflationary pressures are “abating," Godrej Consumer Products Ltd, which sells Cinthol soaps and Goodknight mosquito repellents, said in its quarterly update earlier this month. “With a significant correction in palm oil derivatives and crude oil, which are some of our key raw materials, we do expect a recovery in consumption and gross margins in the upcoming quarters," the company said. Marico Ltd, too, said among key inputs used by the company, copra prices remained soft in April-June quarter and edible and crude oil prices cooled to some extent towards the end of the quarter.
Crude oil prices in June rose 7% from May but declined in July. In June, monthly average prices of palm oil and its derivative PFAD declined 16% and 18%, respectively, from May. In a note dated 12 July, analysts at Kotak Institutional Equities said spot palm oil prices declined 20% in July. “Prices of other edible oils such as sunflower oil are down 7% month-on-month and groundnut oil by 1% month-on-month also moderated," they said.
Some firms see the relief as temporary. “There has definitely been a correction compared to the last four to five months, but not compared to five quarters ago. Pressure has eased but for a short term," said Jaideep Nandi, managing director, Bajaj Consumer Care Ltd, which sells hair oils and soaps.
“The correction in crude is very recent. Derivatives of crude are yet to see an impact, such as light liquid paraffin (LLP, used in skin and hair care products). We don’t expect LLP prices to go down in the next quarter or two. However, if you see, within edible oil, palm is under less pressure now; mustard will also go down," Nandi said. Things still remain volatile because of the dollar, he added. While companies are expected to see some relief over the coming weeks, consumers are unlikely to benefit from this deflationary cycle, Nandi said.
In an 8 July report, analysts at ICICI Securities said most commodity prices peaked in June and cooled after that. For example, palm oil prices dropped 30% from the peak, but average palm oil prices in Q1FY23 were up 54% against the average of Q1FY22. “Though we believe the current quarter would continue to see gross margin contraction, the fall in commodity prices at the fag end of the quarter would release pressure on FMCG firms to take further price hikes, going forward," they said.
Manish Aggarwal, director of Bikanervala Foods Pvt. Ltd, which sells Bikano packaged snacks, said high inflation had a tremendous impact on FMCG players, leading to a downgrading of sales across urban and rural areas. However, the last few weeks have seen prices of a few commodities such as palm, crude oil, and steel tumble. “This is good news for the FMCG industry, as we can hope for a better bottom line this quarter. This is, of course, based on the hope of no further major micro or macro issues cropping up to disrupt the trend," Aggarwal said.
