FMCG companies flag inflationary pressures on margins

Ayushi Kar | | Updated on: Jul 06, 2022
Personal Care sustained its strong double-digit growth trajectory with a 2-year CAGR in double-digits, led by both Personal Wash and Hair Colours.

Personal Care sustained its strong double-digit growth trajectory with a 2-year CAGR in double-digits, led by both Personal Wash and Hair Colours. | Photo Credit: AJAY VERMA

The recent correction in commodity prices and good monsoon forecast augment well for the industry.

FMCG companies are starting to see a favourable environment with the recent softening of palm oil prices and monsoon season, while consumer majors, Godrej and Marico began FY23 with continued pressure on margins. In its quarterly update for Q1FY23, Godrej Consumer Products Limited (GCPL) said, “The Indian FMCG industry continued to remain soft during the quarter and hit hard by inflation levels, aggravating due to geopolitical tensions, leading to successive price increases and impacting volumes.” GCPL predicts lower EBITDA margins year-on-year due to higher input inflation, upfront investments, and weak performance in the Indonesian market. 

Marico noted in its update for Q1FY23 that the rising retail inflation exerted pressure on the share of wallet for FMCG. “In the given context, India business volumes declined in mid-single digits, particularly dragged down by a sharp drop in Saffola Oils. Excluding which, the Indian business posted marginal volume growth,” said the company. Thus, while the company notes that its gross margins will expand YoY, they are expected to remain at the same levels as the preceding quarter. 

Correction in commodity prices

The companies , however, note the recent correction in commodity prices, in addition to a forecast for a good monsoon season, is encouraging. “On the profitability front, we expect lower year-on-year EBITDA margins during the quarter. This is due to input inflation, upfront marketing investments to drive category development, and weak performance in Indonesia. However, with inflationary pressures abating and significant correction in palm oil derivatives and crude oil, which are some of our key raw materials, we do expect a recovery in consumption and gross margins in the upcoming quarters,” said GCPL.

Both companies made no mention of price reduction after seeing the initial reduction in commodity prices, which analysts predict companies will keep prices as they achieve margin gains after two years of commodity inflation. This is lined with analysts’ assessments of the companies’ response to commodity softening.  

Marico said the following about their domestic business, “Excluding Saffola Oils, the India business posted marginal volume growth. Parachute Coconut Oil recorded a minor volume decline, passing on more value to consumers towards the second half of the quarter amidst steady deflation in copra. Value-added hair oils grew in low single digits in value terms despite weak consumer sentiment, especially in rural. Saffola Oils declined in double digits, having to contend with high in-home consumption in the base quarter and significant downtrading visible from super-premium to mass segment in edible oils.” Marico, however, notes its premium and personal care portfolio saw robust growth, despite inflationary pressures, and its digital business also met internal aspirations. 

“In India, we expect to deliver early double-digit sales growth on a high base. Our 3-year compound annual growth rate (CAGR) remains robust and in the early double-digits. We would have mid-single-digit volumes drop on a high base, with a 3-year volume CAGR close to mid-single digits. We witnessed a mixed performance in our Personal Care and Home Care categories. Personal Care sustained its strong double-digit growth trajectory with a 2-year CAGR in double-digits, led by both Personal Wash and Hair Colours. Home Care witnessed a low single-digit sales drop on a high base. However, the 2-year CAGR remained at a high single-digit figure,” noted GCPL.

Published on July 06, 2022
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