Input-Cost Inflation Coming Back To Eat Into Consumer Goods Firms' Margins—NDTV Profit Exclusive
Large companies generally have a hedging strategy to manage the price volatility.
The phase of margin expansion could be behind for makers of staples to soaps as prices of raw materials have started inching up again.
Wheat, sugar, cocoa, coffee, linear alkyl benzene used in detergents, palm as well as crude oil rose year-on-year in March. Except wheat, the commodities also jumped sequentially. But companies would be reluctant to take price hikes, considering the weak demand environment and intense regional competition, posing a risk to consensus margin assumption.
"Our commodity basket is seeing about 8–10% inflation," Mayank Shah, vice-president of Parle Products, said. "We aren't planning to hike prices immediately though as we are prioritising volume growth over margins."
Large companies generally have a hedging strategy to manage the price volatility. They pass on the costs gradually and not always immediately.
Cocoa, the key ingredient in chocolate, has seen a threefold surge in costs over the previous year due to lower production in key producing countries.
"If we consider cocoa inflation, the inflationary pressures would be significantly higher," Shah said. "However, currently we are well-hedged, so not factoring that into our calculations. In April, we will be in a better position to decide whether to absorb or pass on the cost burden."
Coffee inflation hit double digits, rising 15.3% over the previous year.
"The forecasts are that they [coffee prices] will start to plateau towards the end of 2024," according to Sunil D'Souza, chief executive officer at Tata Consumer Products Ltd. "But again, a forecast is a forecast. So, we will continue to move up and down along with coffee prices in order to maintain market share."
The other problem is intense competition.
Manish Aggarwal, director, Bikano, Bikanervala Foods Pvt Ltd says the company is "closely monitoring" the significant rise in input costs, particularly edible oil, over the last few months, which is beginning to exert pressure on margins. But the company has refrained from raising product prices and is absorbing the cost for now. "Based on competitive market conditions, we will take a call on price hikes," said Aggarwal.
Analysts concur. Prices of linear alkyl benzene, for instance, have surged past $1,000 per tonne in the recent weeks, yet price hikes may prove to be challenging for companies, according to Kunal Vora, head of India equity research at BNP Paribas.
"Our detergent price tracker shows prices declining for the first time on a year-on-year basis, while LAB prices have been gradually increasing for (the) past three quarters now," he said in a note on March 22.
The category has seen a 15% price hike over the past two years, with higher hikes in premium brands than mass brands. "But as raw material prices stabilised, stiff competition from regional players, especially in low-unit packs, forced companies to cut prices. Now again, raw material prices are seeing an uptick, but raising prices may be difficult, in our view."
Palm oil prices rose 7.9% sequentially after staying range-bound for the past year even as it remains flattish on a year-on-year basis. Analysts at Motilal Oswal expect the recent spike could affect margins for Godrej Consumer Products Ltd. Hindustan Unilever Ltd.'s commodity basket may see a mixed bag of price fluctuation with high coffee prices offsetting the decrease in tea.
Simply put, the agricultural commodity basket is experiencing a significant uptick in inflation compared to non-agricultural commodities. According to the brokerage, there has been a year-on-year increase of 2.4% and a quarter-on-quarter increase of 1.7% in the agricultural commodities.
Crude oil prices have been range-bound for the last 30 days at around $85 a barrel even as it rose 2% year-on-year in March. Rising crude, coupled with rising prices of vinyl acetate monomer, could dent Asian Paints Ltd.'s margins in a muted business environment, according to Motilal Oswal.
Companies like Nestle India Ltd., TCPL, HUL, Colgate Palmolive India Ltd., Britannia Industries Ltd., Marico Ltd. and Dabur India Ltd. took significant price hikes in direct response to rising input costs last year. But the frequency of these increases slightly decreased this year as major raw material prices cooled.
In February, the consumer goods makers took only incremental price hikes of 2–6% across products, except soaps and edible oil. Coffee and toothpaste, however, have seen the steepest hikes of 9–10%, having not seen so in the peak of inflation. These changes are aimed to boost top-line growth hit by a sustained slowdown in demand. But renewed input cost pressures can negate the effect, and margins can come under pressure.
"The food and refreshment division continues to see positive pricing with inflation in commodities like coffee and sugar resulting in declining volumes," HUL Chief Financial Officer Ritesh Tiwari said in a post-earnings call. The decrease in volumes during the October–December period is expected to continue into the March quarter on the back of price hikes.
"Higher raw-material cost in the current environment is a new headwind," said BNP Paribas' Vora, pointing out that unrelenting inflationary pressure could reverse the "meaningful" gross margin expansion for most companies.
