FMCG margins get a leg up on lower input costs, higher product prices

Paint, soap makers to ride on lower crude oil & palm oil; weaker farm produce to aid F&B sector

While consumption demand in rural and urban markets remains under pressure, fast-moving consumer goods (FMCG) companies have some reason to cheer. With the prices of crude oil and palm oil hovering near their three-month and five-month lows, respectively, the input cost inflation for companies making paints and soaps, such as Asian Paints, Hindustan Unilever (HUL), Godrej Consumer Products and Pidilite, could come down. Interestingly, most of these companies have already reduced the promotional intensity and/or hiked prices of their products to reflect the increase in input costs seen earlier. Both these factors will boost their margins in the near term. 

In fact, price hikes could also aid realisations and compensate for continued weakness in volumes to some extent, believe analysts. The rupee, too, has strengthened in recent times and is hovering around its year high now. This also benefits consumer companies as it further reduces the cost of crude oil and its derivatives. In fact, crude oil derivatives form a large chunk of raw material for most FMCG companies. Crude oil derivatives, such as titanium oxide, palm oil, among others, are prominent inputs in soap, paints, adhesives, hair oil etc. 

“Paint companies, HUL, Godrej Consumer, among others, have already taken price hikes and should see margin expansion if these prices sustain. Though these stocks have rallied, we are positive on them as they will also benefit from stronger rupee and falling crude and palm oil prices,” says Abneesh Roy of Edelweiss Securities.

In the agro commodity basket, falling prices of cocoa bean as well as wheat will benefit companies like Nestle, Britannia, GSK Consumer, etc. Weak tea prices will rub off favourably on Hindustan Unilever and Tata Global Beverages. Higher mentha oil and copra prices, however, will hurt the likes of Marico and Emami, estimate analysts.

So, even as volume recovery is likely to be gradual, lower cost pressures coupled with select price hikes will rub off favourably on FMCG companies' profitability, believe analysts. Most FMCG companies are also focusing on ramping up their premium products while protecting their market share in the mass segment. The push towards ‘premiumisation’ is another long-term enabler to margins for the sector, say analysts. 

Though it is already known, given the high presence of unorganised players in a host of categories, FMCG companies will benefit from implementation of goods and services tax or GST. This is because the GST brings the unorganised players on a par with their organised counterparts, allowing the latter opportunities to gain further market share. Companies with strong market positioning and innovation-led growth focus, thus, will be able to grow profitably.

It is also not surprising that FMCG stocks have gained in recent months — the S&P BSE FMCG index is close to its all-time high. For share prices to go up further a rise in demand remains crucial, though a below-par monsoon could prove to be a dampener.