The fast-moving consumer goods (FMCG) industry will see more price hikes in the quarters ahead on account of unabated inflation in palm oil and crude oil, Sanjiv Mehta, CEO and MD, Hindustan Unilever Ltd (HUL) told Moneycontrol in a recent interview. According to Mehta, the prices will continue to inch up till commodity prices do not abate.
“It’s difficult to predict what would be the precise quantum of price increases, but the way we see it is, commodity costs keep going up, so there will be more price actions,” he said.
(Read: We are a Rs 50,000-crore company but HUL’s best is yet to come: CEO and MD Sanjiv Mehta)
Mehta also said that the margins will continue to be under pressure due to inflation. “Margins will be under pressure in the short term. But then, we'll get it back,” he added.
FMCG companies across the board are battling inflation in key commodities which has hiked their costs substantially and dented their margins. HUL’s overall gross margin contracted by 331 basis points (bps) year-on-year (YoY) in Q4, while the homecare segment saw an EBIT margin contraction of 138 bps YoY and beauty and personal care of 129 bps YoY. The company was able to manage its EBITDA margins, however, on account of its cost-control measures and saw a compression of 20 basis points YoY. HUL had taken a 10 percent price hike across categories in the March quarter of FY22.
“The most impacted categories are skin cleansing – toilet soaps, because of palm oil, and laundry powders, because of crude-based derivatives. These have been most impacted so far but increasingly, we are seeing the impact coming in other categories because of SLES, which is again a palm-based derivative,” said Mehta.
The FMCG honcho, however, does not expect any major impact on HUL due to the Indonesia palm oil ban. “I don’t see it as a long-term issue. The palm oil that we use, the fractionation units, they have not been put under ban,” he added.
Indonesia, a major exporter of palm oil, banned the export of the commodity last week as the country also struggles with supply shortages and inflation. Palm oil accounts for about 40 percent of total edible oil consumption in India and 60 percent of imports and is a major commodity for FMCG and the food and beverages (F&B) industries.
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Economists and industry experts are expecting an impact of the development on these industries.
“Palm oil is a key ingredient in the food processing industry. Rising prices of palm oil will impact costs and margins of several consumer companies,” said Amnish Aggarwal, director - research at Prabhudas Lilladher.
“FMCG staple majors such as Britannia, Hindustan Unilever, Nestle India and ITC would be amongst the key companies affected directly as a result of the ban and higher prices,” said Aggarwal.
(Also read: The new Unilever structure would be right for HUL: CEO and MD Sanjiv Mehta)
Packaged consumer good companies have been battling inflation since FY21. However, the war between Ukraine and Russia has worsened the situation and created a supply shortage for several key commodities.
Mehta of HUL believes settling of the Ukraine-Russia war could be a trigger for the softening of commodity prices.
“When geopolitics gets involved, then speculation also comes in, in anticipation that there would be constraints, prices are driven up further,” he said. “So, you need a trigger for commodity prices to start softening. In current times, a geopolitical settlement between Ukraine and Russia could lead to softening of prices,” added Mehta.
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