Food companies saw margin squeeze in Q1, expect reprieve this quarter

Impact of raw material inflation lingers; margin recovery expected from Q2 onwards

That food companies are under stress has been proved by their first-quarter performance, with margins witnessing pressure.

 

While it will take time for them to benefit from lower raw-material costs, analysts expect this to start showing from this quarter (July-September).

 

Raw-material prices like those of palm oil were high in April-June, but those have eased since then. This is because of companies sitting on inventories with prices at elevated levels.

 

“The quarter was impacted by elevated consumption prices across the commodity portfolio… However, we have noticed stabilising prices for edible oil and cocoa, a declining trend in coffee and stabilising to modest increase in pricing of milk,” said Suresh Narayanan, chairman and managing director, Nestle India, in its results release.

 

Nomura said in its report on the company after its results that its gross profit contracted due to elevated input prices and no new price increases were done by the maker of KitKat during the quarter.

 

“We expect this to support margin recovery from Q3 (October-December quarter) onwards,” the brokerage said. During April-June, Nestle India’s profit before interest, depreciation and tax margin was down 229 basis points (bps) and stood at 21.7 per cent in the quarter.

 

Ethnic snacks major Bikaji Foods increased prices during April-June to mitigate the impact of higher raw-material prices.  

 

“These efforts contributed to sustaining the growth momentum, particularly in our core categories,” said Deepak Agarwal, managing director, Bikaji Foods, in its release. 

 

The company, however, still saw its margin being affected by 128 bps to stand at 14.8 per cent.

 

Balaji Wafers did not increase its prices and focused on maintaining its market share in the quarter.

 

“We are all right with some margin squeeze, but we were still profitable. Despite raw-material prices being higher, we focused on maintaining our market share,” said Chandu Virani, founder and director, Balaji Wafers.

 

An analyst said while raw material prices had stabilised, the impact of that would be seen from July-September onwards.

 

On Tata Consumer Products, Nomura said, the company’s operating profit-margin pressure was a tad higher and it expected a sharp recovery from October-December onwards.

 

The brokerage said in its report: “Tata Consumer Products passed on only 70 per cent of the tea inflation this quarter (50 per cent in Q4), which continued to pressure year-on-year margins. Margins were also impacted by the non-branded business, as a sharp correction in coffee prices led to inventory benefits ceasing and EBIT (earnings before interest and taxes) margins reverting sharply to a mean level of around 12 per cent(vs 19 per cent year-on-year).”

 

It added: “Current tea prices are down 9-12 per cent year-on-year; we expect Q2 (July-September quarter) to see partial benefits and Q3 (October-December) to see full benefits of lower prices, leading to sharp margin improvement, provided there are no new price cuts from unorganised players.” 

Status check

  * Nestle India:Quarterwas impacted by elevated consumption prices incommodity portfolio

* Nomura said Nestle’s gross profit shrank due to high input prices

* Bikaji: Increased prices in Q1 to mitigate impact of higherraw-material prices

* Balaji Wafers: It did not raise pricesto maintain market share despitea margin squeeze

* Tata Consumer Products: Nomura said firm’s operating profit margin pressure was high