Commodities

Stability in crude to augur well for paint cos, FMCG may continue to face headwinds

Abishek Law | | Updated on: Dec 06, 2021
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Price hikes imminent for another couple of quarters, say analysts

Stability and reduction in crude prices may bode well for paint companies hoping to restore margins to last year’s levels by March 2022. But for the fast moving consumer goods (FMCG) companies, including India’s food majors, commodity cost headwinds are set to continue; at least that is what early third quarter FY22 trends suggest.

For FMCG and food companies, the price hikes — the second one this fiscal that came into effect November-end onwards — range between 3 and 20 per cent depending on products, SKUs, and so on, making everything, including breads, biscuits, soaps, shampoos, detergents, etc costlier. Grammage reduction has also been initiated primarily in offerings priced below ₹20.

On the other hand, paint companies — market leaders Asian Paints and Berger — hiked prices from December 5 by approximately four to five per cent, taking the total increase to 18 to 19 per cent year-to-date.

Also see: Surge in quick grocery delivery segment to benefit large FMCG players

Abneesh Roy, executive director at Edelweiss Securities, said the consumer sector has beenso far, passing on 75 per cent of the commodity cost rise at the MRP level. Most companies, including market leaders, were hesitant to pass on full costs as they were afraid of “impacting recoveries”.

“Another two quarters of margin pressure — Q3 and Q4 (December-end & March quarter) — are expected for consumer sector companies; primarily commodity price pressures. There is some stability in a few categories, but I still do not think the price hikes in December are enough to make up for full commodity cost increases. Maybe another two quarters or so of this,” he told BusinessLine .

Larger commodity price volatility

Two of the largest food companies — Britannia and Parle — have signalled the possibility of another round of hikes for the March quarter, which includes a combination of price rise and grammage reduction.

Analyst firm, Nirmal Bang, in a recent report on commodity price trends said, “The data available in Q3 FY22 is not so encouraging.”

Average Brent crude index has also continued to inch up (up 12.2 per cent quarter-on-quarter (q-o-q); up 83.6 per cent year-on-year (y-o-y), till November 30, 2021.

Also see: Crude oil has to top ₹5,600 to turn bullish

Meanwhile, the high-density polyethylene (HDPE) and liquid paraffin (used in hair oil) prices have seen some cooling off in Q2 on a q-o-q basis (till October-end), but are expected to “remain firm”, according to officials at an FMCG firm.

Copra prices have seen some abatement (as per Marico’s Q2 earnings call), however,crude and vegetable oil-led inflation persists. Moreover, other FMCG analysts say it is unlikely for any softening till “maybe Q4 FY22”.

Malaysian palm oil prices remain elevated, as per a report, and are up 17.6 per cent q-o-q and 54.8 per cent y-o-y. Prices of palm fatty acid distillate (PFAD), a by-product of refined crude palm oil used to make soaps, are up 18.2 per cent q-o-q and 56.8 per cent y-o-y. Mentha oil price remains benign (down 0.4 per cent q-o-q and 2.3 per cent y-o-y).

Within agri-commodities, while tea prices have witnessed some softening (down 6 per cent q-o-q and 23.7 per cent y-o-y), commodities such as barley, wheat, sugar, and coffee are seeing pressure.

Barley is up 62 per cent y-o-y and 12.5 per cent q-o-q, even as wheat, sugar, and coffee prices are up for the second straight quarter. Vegetable prices have seen sequential inflation, and fresh milk prices are expected to remain firm, too.

Published on December 06, 2021

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