FMCG, paint companies feel the pain as rupee slides to an all-time low

A weak rupee is playing spoilsport for fast moving consumer goods (FMCG) companies even as they heave a sigh of relief over Indonesia lifting the ban on the export of palm oil, which is a key input for many of their products, and the government cutting taxes on transportation fuels. 

It is not just palm oil — the prices of many other inputs, including packing materials, are linked to the value of the rupee as well as global commodity prices.

Paint companies are also expected to be hit hard by the rupee’s decline against the dollar.

The rupee hit a low of 77.9275 against the US dollar, and at its current level of 77.5462, it is down by about two per cent in the last one month, 4.3 per cent since the start of 2022 and 6.5 per cent in the last one year.

The rupee’s free fall comes at a time when FMCG and paint companies have been battling higher raw material costs for over a year, and have been forced to go for multiple rounds of price hikes. In FY22, for instance, paint companies have taken price hikes to the tune of 20 per cent. FMCG companies have done the same. 

Rising crude oil prices have also pushed up the domestic price of derivatives used in the making of paints. Moreover, since titanium dioxide, one of the main raw materials for making paints, has to be imported, a weaker rupee has made this component dearer as well.  

However, both analysts and paint company executives feel that the impact of a weak rupee on the sector may not be significant.  

“At this point, this (weakness in the rupee) makes a marginal difference. It is a temporary transition due to uncertainty. The rupee will progressively move back to 75 against the dollar and, hence, is a fairly small problem. The bigger problem is that commodity prices have gone through the roof. The industry has had to take steep price hikes in the last five to six months and will continue to take minor price hikes going ahead, due to commodity inflation,” said Hemant Jalan, managing director, Indigo Paints.

Paint companies may begin to pass on the higher raw material costs to the consumers in the coming months, said Sachin Bobade, VP Research at Dolat Capital Market. He added, however, that despite price hikes, demand is not likely to be dented.

Vishal Gutka, VP Research (Consumer and Retail sector) at Phillip Capital India, also does not expect the weak rupee to significantly impact the sector. “Crude oil inflation is a bigger worry as derivatives of the commodity are used in the making of paints,” Gutka said. He expects the sector to find some cushion from the fact that 75 per cent of the paints are water soluble (where water is the base).

FMCG companies, too, are concerned about the overall inflation across commodities due to which, they are having to constantly take price hikes. 

Mayank Shah, category head at Parle Products, said, “Prices can correct from current levels due to Indonesia lifting the ban on palm oil exports. So the impact of a weak rupee will get negated due to the fall in palm oil prices.” 

He explained that a few Indian companies that had stocked up on palm oil before Indonesia banned its export, will also offload stocks as fresh stocks hit Indian ports. This will also cause domestic prices to correct.

Another executive of an FMCG major, who spoke on the condition of anonymity, also expects inflation in the cost of commodities to remain a major concern since companies will have to resort to price hikes to pass on any incremental pain. 

Even before the rupee sank to record lows against the dollar, FMCG majors like Hindustan Unilever and Britannia Industries had said that they would continue to increase prices to combat inflation. 

Ritesh Tiwari, chief financial officer at Hindustan Unilever, said in a post-result press conference last month: “We expect more inflation sequentially and will dynamically manage our business, we will continue to drive savings harder and take calibrated pricing actions while protecting and growing our consumer franchise. Our margins will decline in the short term as the price versus cost gap increases.”

Earlier this month, Britannia Industries told investors that it would take higher grammage cuts instead of increasing prices. The biscuits major took a 10 per cent price hike in FY22 and has reduced pack sizes to deal with rising costs. 

In FY21, the ratio of grammage reduction was 65 per cent, which will be higher in FY23. The management had said that it would hike prices by 10 per cent if the prices of raw materials continued to remain at current levels.