Inflationary pressures, led by crude, expected to hurt FMCG companies

Inflationary pressures, led by crude, are expected to be a concern for the fast-moving consumer goods (FMCG) companies in the coming months. The country's largest FMCG player, Hindustan Unilever (HUL), called this out as a risk on Monday, saying it was watching both crude and currency volatility closely.

While vegetable oils (such as palm oil) have remained largely benign, crude has jumped 50 per cent in the past one year to $71- $72 a barrel. A spike in the price of crude affects derivatives such as linear alkyl benzene (LAB) and high-density polyethylene (HDPE), which are key inputs for the FMCG companies. An increase in price of these inputs, said G Chokkalingam, founder of Equinomics Research & Advisory, would mean that production costs would increase for firms, putting pressure on them to raise product prices. 

LAB, for instance, is used in making detergents and constitutes almost 60-70 per cent of the latter’s input cost. HDPE is used in packaging material for all essential consumer items from soaps to detergents, hair oils, creams, shampoos and toothpastes. Packaging costs of these products constitute 15-25 per cent of overall production cost for companies.

HUL has already taken an estimated 2-2.5 per cent price hike in its home care portfolio (mainly detergents) in the April-June period and is expected to widen its pricing action across categories in the coming quarters. “Our strategy is to take judicious price hikes. Since we have a portfolio of brands, we don’t do it on an equivalent basis across pack sizes. We look at it from an overall point of view, keep in mind the price-value equation and then take hikes,” said Sanjiv Mehta, chairman and managing director, HUL, on Monday.

To be sure, inflationary pressures aid value growth, important for the FMCG companies. Price hikes also protect margins from eroding, both at the gross and operating levels, a key metric in determining the financial health of a company. But the fallout of price hikes, taken on a sustained basis, is its impact on volume growth, which the analysts said would begin to show with a lag. “For the next two to three quarters, I don't see an impact on volume growth because of demand, especially in rural areas, is improving. So, companies do have pricing power for now, though the risks could grow towards the end of the current financial year and into the next year,” said Kaustubh Pawaskar, senior research analyst at Mumbai-based brokerage Sharekhan.

Abneesh Roy, senior vice-president, research, institutional equities of Edelweiss, said, inflationary pressures could help companies in grabbing share from smaller players, who’ve been a threat in the past few years. “I see it as an opportunity because if companies are able to hike prices judiciously, they will not only land up protecting margins, but consumers will not desert them, since the hike in absolute terms will not be huge. With smaller players, it is just the reverse. An inflationary environment exposes them significantly. They are neither able to hike prices because their strategy hinges on keeping prices low and costs on the other hand are moving up. So, they actually could shrink operations during such a period, leaving the field wide open for the larger companies,” he said.

 

According to analysts, firms such as Godrej Consumer, Dabur, Marico, Emami, Bajaj Corp and Jyothy Laboratories are likely to increase product prices in the region of 4-5 per cent in the next few months, while companies such as Asian Paints could see sharper price hikes owing to its higher exposure to the crude basket.