FMCG companies such as Hindustan Unilever (HUL), ITC, Dabur, Marico, and Britannia are finally witnessing a much-needed fall in commodity prices, which have been a concern for the segment for more than a year now.
Crude oil is at a nine-quarter low, and has dropped 9.5 percent in the second quarter (Q2) of fiscal 2023 compared to Q1. “Crude oil prices are currently hovering at $88 per bbl (or per barrel), a 34 percent dip from the recent high of $134 / bbl in March, 2022,” said a note by Motilal Oswal.
Crude-linked derivatives such as linear alkyl benzene, light liquid paraffin (LLP), titanium dioxide, etc., are used as input in several non-food FMCG products. LLP, for instance, is a key raw material for skin and hair care products.
Similarly, the price of palm oil also has reduced substantially in Q2. At less than $800 / mt, palm oil, a key commodity for FMCG products, especially soaps, is at its 52-week low.
According to analysts, this bodes well for FMCG firms as their margins have been under stress for several quarters due to inflation, even as they struggle with a fall in consumption.
“Palm oil is a key input in soaps, biscuits, and noodles, and we expect HUL, Godrej Consumer Products (GCPL), Britannia, and Nestle to be key beneficiaries of this trend,” said Abneesh Roy, executive director, Edelweiss.
The full impact of the downtrend, however, would only be felt in the second half (H2) of the financial year, or Q3 onwards, said analysts.
“We expect 200 basis points expansion in gross margins in H2 vs H1 for the FMCG sector in FY23, and a strong FY24,” added Roy.
Motilal Oswal, too, expects a recovery in FMCG margins by Q3. “We expect gross margins to remain under pressure in the near term as companies are sitting on inventory purchased at higher costs, which will get consumed in the near term. Margins should start improving from 2HFY23, due to the dual effect of falling input costs and price hikes by the companies,” it said.
According to the brokerage, as input prices improve, companies can pass on the price benefit to consumers to spur demand.
Developments such as a rain deficit in states such as Uttar Pradesh (UP), Bihar, and West Bengal (WB), and depreciation of the rupee, could impact the sector and derail the benefits of declining commodity prices, said analysts.
“While the rainfall has been above average in India, it is below average in the northern belt, which is a key contributor to FMCG demand. Rural demand is not showing any signs of a pick-up. Cognisant of this situation, and supported by a moderation in commodity prices, companies may look to sharply roll back price hikes and launch various schemes to revive demand,” said Motilal Oswal.
The FMCG industry has been grappling with sky-high inflation in raw materials and several commodities for more than a year now. The price of crude oil, according to HUL, was up 60 percent year-on-year (y-o-y) in the June quarter, while caustic soda was 125 percent costlier. The prices of two other key commodities — palm oil and polyethylene — were up 50 percent and 25 percent, respectively, year-on-year in the June quarter.
The companies have been passing on the cost increase to consumers, though cautiously, given the tepid demand scenario. In Q1, HUL raised the prices of some SKUs by 8-10 percent.
Other leading FMCG firms like Britannia, Nestle, Godrej Consumer Products, Tata Consumer Products, Dabur, and Marico have also raised prices consecutively for several quarters now.
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