Input-cost-led price hikes are starting to weigh on demand, and people are trimming their shopping list and picking smaller packs, according to a report from Nomura.
In the current scenario, the brokerage prefers companies with higher sales contribution from urban markets, which are recovering better vs persisting weakness in rural, and companies with lower cost-inflation headwinds on margins, which are relatively better insulated in the current scenario.
Sharp price hikes
Hikes have been sharp in most FMCG companies in Q4FY22. While this is the eighth consecutive quarter seeing a price rise, the earlier six quarters saw increases only in mid-high single digits. In this quarter, the price hikes have been in double digits, ranging from 10 percent to 20 percent.
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Rural demand had begun to slow down from Q3FY22 and this moderation “intensified” in the last quarter of FY22, according to the Nomura report. Urban demand had made a brief recovery in Q3FY22 but then it slowed in the last quarter with “the consumption of discretionary categories once again falling below pre-pandemic levels”.
People will now start shopping for smaller sized packs and there will be a cut back in the consumer pantry, according to the report. In fact, the brokerage expects value growth to be more price-led than volume-led, which is a reversal of the trend earlier.
‘Unprecedented’ cost inflation
The “unprecedented rise in input costs” have been pressuring gross profit margins for 10 consecutive quarters of consumer companies. But, the full impact of the costs is yet to be felt. That will be seen only in the first quarter of FY23, after companies have exhausted their low-cost inventory, said the report.
The report listed inputs that have seen higher cost-inflation, and inputs that have had lower cost-inflation.
Among the ones with higher numbers are palm oil (19 percent qoq, 56 percent yoy), crude oil (25 percent, 63 percent), packaging (3 percent/13 percent), wheat (3 percent/19 percent), coffee (flat/73 percent) and liquid milk (8 percent/16 percent).
Among the ones with lower numbers are copra (-8 percent qoq, -30 percent yoy), sugar (-2 percent, 8 percent) and mentha oil (4 percent/1 percent).
Also read: Stagflation not too farfetched: Bernstein's Rupal Agarwal
To absorb these hikes in input costs, price hikes have been sharp but the hikes still lag, according to the report. They will only “partially offset the linear input-cost inflation”, it said. “More rounds of sharp price increases to continue, especially in soaps, detergents, edible oil and paints, as inputs for these products have seen elevated cost inflation due to ongoing geopolitical tensions,” said the report.
This trend will help large, organised players to gain more market share, it added.
Operating profit margins (OPMs) of most companies are expected to decline further in the fourth quarter of FY22–even after falling for four consecutive quarters–both year on year and quarter on quarter. This is because other costs such as of travel and freight have normalised to pre-pandemic levels, it stated, and added that the companies have cut their media and ad spends in Q4FY22 to reduce the impact on OPMs.
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