Economy

India Inc faces margin pressure as costs pinch

Abishek Law | | | Updated on: Oct 30, 2021
image caption

Companies across segments warn of impending price hikes

Companies across segments — including FMCG, cement, paints, and consumer durables — are witnessing a pressure on margins with increasing raw material costs. While Q2 gross margins (and EBITDA in some cases) levels have taken a hit due to input price rise, most companies are now hinting at a price rise post Diwali.

Consumer goods companies have witnessed unprecedented inflation in several key raw material.

Cost pressure

Sanjiv Mehta, CMD, HUL — the country’s largest FMCG player — during an earnings call said prices for many commodities continue to be at multi-year highs. Although tea prices have softened versus record levels of 2020, prices are still high compared to 2019 levels. Further, global supply chains are witnessing massive disruption, with shortages of shipping containers, skyrocketing shipping rates, congestion at ports and the recent energy crisis in China.

According to analysts, edible oil prices have climbed by 35–50 per cent year-on-year, while that of crude derivatives, a key material for paint companies, has jumped by 30 per cent y-o-y.

Also see:

More

Amit Syngle, CEO and MD, Asian Paints, said during the earnings call, “ We have never seen, I think in the last 3-4 decades, inflation which is so strong. And overall inflation is closer to about 18–20 per cent when we see from a Q3 of last year.”

UltraTech — the largest cement-maker in India — in its quarterly earnings call, spoke of coal shortages. Fuel prices have seen an unprecedented rally of $50 jump in less than a month (as on October 18) added to the stock built-up requirements of West and North Asia for the winters. In India, “all the coal supplies were being diverted to the thermal power plants”. Hence switching back to petcoke — whose prices are up 2x — “makes economic sense”, the company management said.

Margin pressure

HUL saw a decline in gross margins in Q2FY22 by over 150 basis points y-o-y – indicative of raw material pressure – to 50.8 per cent (52.3 per cent) while EBITDA margins dropped 40 basis points y-o-y to 25 per cent. The company management said it remains “cautiously optimistic about coming quarters” but reiterated that “gross margins are likely to remain under pressure”. The company hinted at “judicious pricing actions coupled with cost agility and savings programmers''.

Another of India’s larger food companies, Nestle, saw a 240 basis point dip in gross margins y-o-y. Margins stood at 55.7 per cent in September quarter end (against 58.1 per cent in the year-ago-period) and EBITDA margins dropped 90 basis points y-o-y to 24.5 per cent. The company has said that price of nine out of 13 major raw materials are “close to or at 10 year max levels” while high inflation persists across the board. Inflationary pressures are expected in the coming quarters too.

Marico — makers of Parachute coconut oil — saw over 560 basis points dip in gross margin to 42.5 per cent (48 per cent year-ago) primarily on account of increase in edible oil prices. The company expects gross margins to improve sequentially in Q3 and Q4. It expects an improvement in operating margins to play out only in Q4, given that ad spends will rise from Q3 and a large part of the benefits of a second round of cost rationalisation measures will start accruing in Q4.

Also see:

More

Asian Paints — the country’s largest paint maker — reported a gross margin of 12.7 per cent, a multi-quarter low in Q2FY22, and down from 16.4 per cent in the preceding three months. In an analyst call, company management said that its aim is to maintain operating margin within a band of 18–20 per cent through a mix of cost savings and “calibrated product price increases to offset input cost rise”. Till September 30, the company took a price hike of 7 per cent against a 21 per cent material inflation.

Price hikes

Analysts tracking the sectors say price hikes are inevitable if companies are to maintain margins.

For instance, paint companies have already alerted their channels of a 8–12 per cent price hike November onwards. Channels BusinessLine spoke to said Asian Paints & Berger Paints — two of the largest in the sector — have called for 9 and 8 per cent hikes, respectively, their sharpest and highest ever this fiscal. There have been two to three price hikes in paint prices already this fiscal.

Asian Paints management in their earnings call said, “We have taken a series of price increases and would look at further price increase to mitigate the impact of this persistently high inflation. We are confident that we should be able to turn this around in the coming quarter.”

Berger is yet to declare its Q2 results.

UltraTech Cement’s ED and CFO, Atul Daga, during its earnings call said the company initiated price hikes as late as in October. But these “are not enough”. Prices have gone up by 3–7 per cent or ₹10-15 per bag on an average depending on regions in India.

“Sometime during the month of October we increased the prices in almost all the regions, the prices are now back to where they were pre-monsoons. This is certainly not enough to cover cost pressures,” he said, adding that “…there is a general expectation among infra players in dealer community that price rises are imminent. So, there is very little resistance.”

The cement industry, Daga said, would require a minimum of 10 per cent price hike to go back to Q1FY22 margin levels.

Price point rises

As per Nielsen, FMCG demand saw moderation in August and September.

Also see:

More

HUL’s Mehta, while commenting on price hikes, said, “The price increase happens in two ways. One is when you take the MRP up, the other is when you reduce the quantity of products in a pack. When it comes to price point packs, the price increase happens when you reduce the quantity of product in a pack while protecting the price point. While you protect the price point, because of the reduction in quantity, this has an impact on your volume growth coming down, even though the number of units may remain same.”

“So for us, keeping the consumer franchise intact and protecting the business model when the environment is volatile is very critical,” he added.

Published on October 31, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you