Price hike not enough to cushion FMCG companies' margin pain

Volume growth, amid soft rural demand, is also a key monitorable

Fast-moving consumer goods (FMCG) companies have taken price hikes in the previous quarter and announced further price hikes and/or grammage reductions to mitigate commodity inflation. But this may not be enough to cushion operating profit margins in the ongoing quarter.

Consumer companies and analysts believe some relief may be seen in the January-March quarter, but margins will continue to remain under pressure in the October-December quarter as commodity costs continue to remain high.

Companies like Hindustan Unilever (HUL) and Marico have warned of near-term margin pressures as advertising and promotion spends are also expected to rise in the October-December quarter.

Companies are increasing advertising spends as the economy continues to unlock with increase in mobility across the country.  

Ritesh Tiwari, chief financial officer of the country’s largest FMCG company, HUL, told investors after an earnings call, “We do expect to see some transitory impact in the cost of material as a result of this (supply chain) disruption.” He also added that the company does expect margins to be under pressure in the near-term.

The maker of Rin bar and detergent powder has taken calibrated price increases across fabric wash and household care portfolios to partly offset high input cost inflation during the July-September quarter.

Tiwari also told investors that HUL continues to hike prices in the categories it is witnessing input cost inflation.

Saugata Gupta, managing director (MD) and chief executive officer (CEO) at Marico, told investors in the company’s earnings conference call, “Gross margins will move up sequentially in the third and fourth quarters. However, the improvement in operating margin is likely to play out largely only in the fourth quarter.” He added that advertising and promotion spends are likely to rise in the quarter.

While some cushion is expected from the implementation of various cost-saving measures, it may not be sufficient to fully offset the pressure on operating profit margins in the October-December quarter.

“Raw material costs (for the sector) are likely to remain under pressure because palm oil and crude oil are the highest in six years,” said Sachin Bobade, vice-president (V-P)-research at Dolat Capital Market.

Adding that, passing the higher commodity costs to the consumer in the form of price hike will be limited, especially in the economy category, as higher price increase will dampen volume growth. Bobade further said advertising and promotion spends will normalise as the economy reopens, putting further pressure on margins.  

Among other companies, biscuit major Britannia Industries has taken a price hike of 4 per cent in the July-September quarter and plans to take another 6 per cent hike across its portfolio through the rest of the financial year. But the company has also warned investors that price hike comes at the cost of volume growth.

“We are going to see a period of low volume growth, not just for us, but for the industry as a whole,” Varun Berry, MD of Britannia Industries, told investors in its earnings conference call.

“It’s not a great place to be. But considering the kind of inflation we are seeing in the marketplace, there is no alternative,” he added.

He warned the company will probably see a scenario of low volume growth for a year or so.

“In a situation like this (high commodity costs), there is no substitute for a price increase. One-third of our pricing is through maximum retail price changes and two-thirds through grammage reduction,” he said.

Analysts, too, believe price hikes and grammage reduction are likely to hurt volumes of FMCG companies.

Vishal Gutka, V-P, consumer and retail at PhillipCapital, says volume growth for FMCG companies will come under pressure due to grammage reduction.

“Price hikes that companies have taken and plan to take in the months to come will cushion margins towards the fag end of 2021-22 and the first quarter 2022-23,” adds Gutka.

For the FMCG sector in India, volume growth was 4.6 per cent in the quarter ended December 2020 and 4.5 per cent in the quarter ended March 2021, according to the NielsenIQ data. This rise in consumption was seen last year after the first half of 2020 took a hit as supply chains were disrupted due to the lockdown to curb the spread of the novel coronavirus. 

Slowdown in rural demand

A worrying factor to add to the woes of FMCG companies is a slowdown in rural demand. While July and August witnessed strong demand, many companies witnessed slowdown in September and are monitoring how demand pans out in the hinterland.  

Rural sales typically contribute 35-50 per cent to consumer companies’ top line.  

However, HUL said its rural performance in September was robust, but pointed out that the Nielsen numbers indicate a slowdown in demand, which were otherwise robust throughout the pandemic.

Sanjiv Mehta, chairman and MD at HUL, told investors that urban growth is picking up and hopes it will continue to improve as mobility increases.

“We need to monitor the situation closely for the next few months to see how underlying demand is shaping up,” said Mehta.

Mohit Malhotra, CEO at Dabur India, said it is not slowdown that was witnessed in rural India, but liquidity pressure, and stated there is a bit of concern.

Consumption sentiment in the categories Marico is present in is largely held up, but there was a moderation in the run-rate on a sequential basis, said Gupta, adding that the stress, especially seen in rural areas, was witnessed towards the end of the quarter ended September.