Escalating ingredient costs may cause lean patch

Shailesh Menon

Mumbai, Sept 12

The food processing and bakery products sector has given the markets something to munch on.

Stocks of major players in this slow-moving sector have been performing well on good corporate results, helpful economic conditions and good weather.

The Nestle stock closed at Rs 1,066.60, up Rs 39.50 or 3.85 per cent, on the BSE on Tuesday.

According to market analysts, the company has been faring well in the market for quite some time.

"Nestle has a very good edge over its competitors. The company has commissioned its seventh factory in Uttaranchal, a tax shelter location. Their products are spread across the sector and are in great demand. Nestle's chocolate segment has good presence in the Indian markets," said a company watcher.

Britannia's acquisition and investment plans have helped the company fare well on the exchanges. The company's shares ended the day at Rs 1,043.85, up by Rs 9.65 or 0.93 per cent.

The company has plans to hike stake in the recently acquired Bangalore-based Daily Breads Pvt Ltd.

It is also expected to come out with additional flavours of existing products and new products.

Milkfood Ltd has logged close to 40 per cent rise in stock price over the past month. The company scrip closed at Rs 122.45, up by Rs 11.10 or 9.97 per cent on the BSE.

"The food processing and bakery sector is riding high on the good monsoon, reasonably good crops and sober agri prices. The stocks falling in this sector are steady movers, making them a safe investment bet for longer periods," said Mr Janish Shah, Head (Research), Networth Stock Broking Ltd.

However, there are apprehensions over rising wheat and milk prices.

Commodity analysts said that food processing companies will have to undergo a lean period due to escalating ingredient costs.

Market watchers are expecting a big rise in the price of glucose biscuits, a major product variant of these companies.

"Wheat prices have gone up drastically due to the absence of adequate stocks and the need to import. This will shave the profit margins of these companies, at least in the succeeding quarters," said Mr Rajesh Sharma, Senior Research Analyst, Angel Commodities.

Although shaved margins will call for increased volumes for these companies to remain afloat two years down the line, the long-term prospects are still good because opened-up rural markets and an ever expanding consumer base will ensure volumes, he added.

(This article was published in the Business Line print edition dated September 13, 2006)
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