Moneycontrol Pro Panorama | Managing volatility turns complex for FMCG CFOs 

Just when it seemed that consumer companies would enjoy benefits from a sustained fall in commodity prices, a surge in food prices posed a threat to their packaged foods business

Dear Reader,

It’s not an easy time being the chief financial officer of an FMCG company these past few years when commodity prices have been volatile. That scenario is not letting up in FY24 either. Just when it seemed that consumer companies would enjoy benefits from a sustained fall in commodity prices, a surge in food prices posed a threat to their packaged foods business. Still, the home and personal care segments were relatively unaffected and multi-category companies would still be on a better footing. But an increase in global crude oil and palm oil prices in recent times could reverse some of the gains accruing to them. Commodity inflation is making a pitch for a return to investor decks in the forthcoming quarters.

Today’s Chart of the Day shows the FAO’s Food Price Index reporting an increase in July, as edible oil prices rose for the first time after seven consecutive months of decline. While cuts to production outlooks in countries growing these crops form one reason for the increase, rising crude oil prices are a reason too, as palm is also used to make biofuels with prices tracking that of crude oil. Read here on why Saudi Arabia is cutting crude output. Since derivatives of crude oil are used as inputs in home and personal care products, rising prices also influence packaging costs. Similarly, palm oil is used to make packaged foods and its derivatives are also used to make everything from soaps to shampoos. Inflation in palm oil affects both food and non-food products as a result.

If the uptrend seen in July continues, then eventually the landed cost of imports of these products paid by companies will increase and post-September quarter results, CFOs will be outlining to analysts their plans to tackle a resurgent inflationary situation. Such swift reversals in commodity price trends have become common in recent years, but are nevertheless difficult for companies to manage. Consumption gets hurt if there are frequent price changes of products and moving the grammage up and down could also hurt purchases by those who buy fixed-price packs. While companies claim to have become more agile in making price increases, it’s not like they can change prices every few weeks.

What’s worse is that the government too wants to keep a tight control on costs, which makes life more difficult for companies. Consider what Patanjali Foods had to say about the poor performance of its edible oils business in the June quarter, incurring a loss of Rs 147 crore compared to a profit of Rs 114 crore in the preceding quarter and a profit of Rs 268 crore in the year-ago period. It talked about subdued market conditions in the edible oil market due to falling prices -- the sudden fall left the industry holding high priced inventory and stocks in transit. But this is a usual occurrence when inflation reverses. Brands reduce their prices gradually, reflecting their blended raw material cost to protect margins even as they cede ground to unbranded/loose oil players that gain share in a falling market as they buy in the cash market.

So, why did companies selling branded products not do so this time? This extract from Patanjali’s results’ statement explains, “Further, government intervention for lowering prices in spite of holding high priced inventory impacted profitability negatively during the quarter”. Readers will remember news reports of meetings called by the government where representatives of edible oil companies would be present. They were asked to adjust their retail prices immediately to reflect the decline in international prices to give relief to consumers. They appear to have had little choice but to comply, and the results are visible. Adani Wilmar too reported a loss in edible oils in the quarter and attributed it to the fall in commodity prices and hedging-related losses.

The fall in commodity prices had already led to FMCG companies passing on benefits to consumers, by cutting prices or increasing the weight of fixed denomination low-price packs. This was being done in phases, depending on the reduction in costs and the demand-supply situation in that product category. For instance, demand has been worst affected in rural areas and for smaller packs, so variants sold in these regions will benefit more, compared to well-to-do urban consumers who are moving towards more premium packs.

However, all these calculations may need to be reworked if the uptrend seen in prices of commodities used by FMCG companies continues.

Investing insights from our research team

LIC profit soars, but business growth, margins stay lacklustre

Hero MotoCorp Q1 FY23 — Lower input cost gives margins a leg-up

Apollo Hospital: Profitability of non-hospital businesses remains a key concern

Campus Activewear: Strong earnings growth to resume from H2

Avalon vs Elin – Which EMS stock looks promising, post results?
Pidilite Q1: Solid execution gets traction
KEC International: All-round improvement to support earnings, stock

What else are we reading?

Large, mid or small-cap — What’s the ideal portfolio composition?

In The Money | Enhancing the naked short put via the bull put spread

New criminal laws will move things forward, up to a point

Why the government’s ‘Make in India’ move on laptops will hurt more than help

Jaw-dropping numbers from the Index of Industrial Production

The Eastern Window: Is the Chinese economy really a 'ticking bomb'?

The US now accepts national and economic security can’t be separated (republished from the FT)

India Unleashed: Charting a multi-decadal growth story

Why founders need to be incentivised with ESOPs

Markets

MC Interview: Food inflation surge likely in near term, expect easing by FY24 Q4: Kotak's Suvodeep Rakshit

Personal Finance

Fund Funda: Why Nippon India MF’s Shailesh Raj Bhan is bullish on innovative firms


Technical Picks: BHEL, PNB Housing, Chambal Fertilisers, Guar gum, ITC and USD-INR
(These are published every trading day before markets open and can be read on the app)

Ravi Ananthanarayanan
Moneycontrol Pro