Consumer goods companies on a tightrope as Ukraine-Russia war fuels further inflation

The Ukraine-Russia war has set the fast-moving consumer goods (FMCG) players on a tightrope. The companies on the one hand have to battle inflation, which has resulted in high input costs, and on the other, they have to absorb as much as costs as possible, given that a slowdown in demand does not support price hikes.

“Several FMCG companies in December-January were in margin improvement mode, which is now again getting disrupted with the war,” said Manoj Menon, head of research and consumer analyst at ICICI Securities Ltd. “Given the tepid demand scenario, most companies, however, will be cautious in passing on the entire cost increase to the consumers.”

The cautious stance, though, will hurt their margins, indicate analysts. They expect the impact of price rise in various commodities to show on the performance of these companies in the first quarter (Q1) of financial year 2023.

“Q1 is more likely to get impacted due to the rise in crude oil prices as in Q4 (of FY22), companies like HUL (Hindustan Unilever), Britannia have taken price hikes and there is a lagged impact of inflation due to inventory, forward contracts. Also, the full impact of price hikes taken in Q3 will show in Q4, especially for paint companies,” said Abneesh Roy, executive director, institutional equities, Edelweiss Securities.

The FMCG industry has been grappling with increased input costs on account of price rise in several key commodities for several quarters now. A tepid demand scenario has worsened the matters for these companies as they are unable to pass on the cost increase to consumers fearing an impact on consumption. In the third quarter, companies such as HUL, Godrej Consumer Products, Emami and Marico registered low to flat volume growth as demand for their products declined. HUL reported volume growth of 2 percent in the quarter ended December compared with 4 percent growth in the second quarter. Godrej Consumer Products, Emami and Marico reported flat year-on-year volume growth in Q3.

FMCG companies have been cautious about passing on the increased costs to consumers and are taking staggered price hikes and looking for alternatives such as weight reduction for low-unit packs (LUPs).

“Organisations will have to gear up and take measures to absorb some of the cost through aggressive optimisation initiatives and perhaps pass on some of the pressure to consumers in a calibrated manner,” said Saugata Gupta, managing director and CEO, Marico.

Roy of Edelweiss indicated that if current crude oil prices sustain FMCG and Paint companies will have to take further hike of 3-4 percent.

Companies such as Dabur, HUL and Britannia had indicated further pricing actions even before the war broke out.

“The inflation impact is not mitigating. We are seeing continuous inflation despite a base of 4-5 percent inflation in the last year. On top of that, we are again seeing a 4-5 percent inflation,” Mohit Malhotra, CEO of Dabur India, said on a post-earnings investor call in February. “The company may have to take more price increases going forward.”

Britannia MD Varun Berry said that on account of unprecedented inflation across commodities, the company will increase prices by 10 percent in the fourth quarter ending March.

“The material inflation was 4 percent in the first quarter, 14 percent in the second quarter, and in the third quarter, it was 20 percent,” Berry said in response to a query on a call with investors after reporting Q3 results. “We took a 1 percent price increase in Q1, a 4 percent price hike in Q2 and in Q3 we took an 8 percent price increase. And we plan to take a 10 percent price increase in Q4.”

According to industry experts and stakeholders, the war between Russia and neighbour Ukraine will create a supply shortage of many commodities leading to higher prices. Rising crude oil prices are also expected to fuel inflation in several commodities such as crude-linked derivatives.

“It is going to have a huge effect on crude oil. For the previous seven-eight years it had been below $100 but of late it has crossed the mark, impacting several industries in addition to the food industry. For instance, formalin oil, RBD (refined, bleached and deodorised) oil will see a hike in price. Price hikes will have a huge impact on most of our products,” said Krishnarao Buddha, senior category head at Parle Products.

Executives at other companies, too, expect an impact on raw materials due to a rise in crude oil prices. “The evolving geopolitical scenario can flare up the prices of crude oil and other commodities further, which will have a cascading impact on raw materials and packing materials,” said Gupta of Marico.

Though most FMCG companies will witness increased input costs, industry stakeholders said the ones highly dependent on vegetable oils and packaging material will suffer more.

“The companies which have higher portion of packaging material will see an immediate impact because of high crude oil prices,” said Deepak Jasani, head of retail research at HDFC Securities.

“Players which are into sunflower oil will also face issues in sourcing the product as the majority of the commodity in India is imported from Ukraine and Russia,” he added.

According to Buddha of Parle Products, vegetable oil, which is used in several other FMCG products like anticaking agents and soaps, will also experience inflation.