A late burst of monsoons, preceded by the announcement of a hike in MSP, is expected to buoy rural demand which gives home-grown FMCG company Jyothy Labs a chance to hike product prices in “select stock-keeping units (SKUs)” as it looks to retain gross margins at historical levels of 49 per cent and offset a possible increase in raw material price.

According to Ullas Kamath, Joint Managing Director, Jyothy Labs, the company will look at a 2–3 per cent price rise across large SKUs which have higher off-take in urban markets in the pre-festive months.

New price points — with a minor 1 or 2 per cent hike — have made way in select markets from this month.

Rural markets

Kamath told BusinessLine , “With good monsoons and a MSP hike, we do not see any pressure on rural demand. Food supplies are taken care of through government schemes and so the share of non-food to food spending (in rural households) is significantly up.”

While there is some softening in input costs since July end, the company can hedge “for the next three to five months, at the most.”

“If there is a significant fall in raw material prices, then we may not need to hike prices. But if the fall in raw material prices does not go below 5 per cent, we will need hikes; and this has to be done without tampering the demand in the convenience price points,” Kamath said, adding, “That way, we do not lose out on convenience price points or LUPs (smaller value pack).”

Urban markets

In the urban markets — which make up 60 per cent of sales — the company, known for its Exo dishwashing bar, and liquid and Margo soaps, is not favour of a grammage reduction but would prefer price hikes.

According to Kamath, a 3 per cent price rise on a ₹200 offering is just ₹6 which doesn’t impact the user in metros or those buying family packs while on modern trade (hyper market and super markets) and e-commerce, such price rise is offset through consumer offers.

E-commerce accounts for 5 per cent of the company’s turnover while modern trade is 10 per cent.

Margin dip

The company saw a 3 per cent dip in gross margins for Q1FY22 while volumes saw a 21 per cent growth. It reported a turnover of over ₹500 crore.

Operating margins contracted 12 per cent in the quarter ending June 2021 from nearly 17.66 per cent a year-ago.

Kamath said raw material costs went up by 10 per cent which was partially off set by the 5 per cent price rise across categories and a 2 per cent cut in operating costs.

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EBITDA margins at 16 per cent are “doable” for FY22 as the company continues to look at double digit growth (in volume) to the tune of 20 per cent .

“I feel the gross margin blip is temporary. It’s a matter of time before we are back up. We are gaining market share across categories. So yes, some operational efficiencies will come in. But then again, raw material prices continue to be a concern,” he added.

Convenience price points

Previously, some FMCG companies had decided to vacate the ₹5 price points in categories like soaps or washing bars and ₹1 offerings in shampoos, primarily due to rising costs, but this skewed overall demand and volume growth for these companies, market sources say.

Companies reduced low unit pack (LUP) supplies — primary in ₹5 to sub-₹5 offerings — across urban markets while pushing ₹10 priced ones in their place.

Typically, for Jyothy Labs, small unit pack sales are around 30 per cent of the turnover with convenience price points varying between ₹5 and ₹20.

Rural demand has been growing in line with the company’s expectation of 1.5x of urban demand after it initiated a post Covid rejig of portfolio focussing more on pushing LUPs in rural markets while ramping up distribution.

By the end of FY22, LUPs should be contributing around 40-42 per cent of sales, in line with the industry average.

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