Why FMCG firms’ margins may face pressure

Even as raw material prices start cooling off from their peaks, fast-moving consumer goods (FMCG) companies’ margins are expected to remain under pressure at least in the next quarter.

This is because commodity prices continue to remain high year-on-year (YoY).

Consumer companies will also continue to increase rates as they have been taking price hikes in a staggered manner.

They have not yet passed the entire price increase of raw materials to consumers.

Commodity prices of crude palm oil at Kakinada port are still higher by 12 per cent while at Kandla port they remain up by 8.8 per cent.

M-grade sugar prices continue to remain higher by 7.2 per cent at Kolhapur and RBD palm olein remains elevated by 9.8 per cent at Kakinada port.

“Commodity prices have softened from their peaks but they still remain elevated compared to last year.

“This will continue to impact margins at least for another quarter.

“Also, money in the hands of rural consumers will come post harvest. This is expected to begin only from October,” Vishal Gutka, vice-president of research (consumer and retail sector) at Phillip Capital India told Business Standard.

Echoing the same, Sachin Bobade said consumer companies are still sitting on high-priced inventory.

This will be with them till July and they will be able to procure lower-priced inventory from August thus gradually reducing the pressure on margins.

He said, “Commodity prices have seen significant correction from their peaks.

“However, companies will only be able to replenish and buy lower-priced inventory by August.

“The impact on margins will be gradually seen in August. While margins may improve in Q2 compared to Q1,  but Q2 margins will continue to be lower compared to last year.”

FMCG prices will continue to remain higher, Hindustan Unilever (HUL) told investors during its annual general meeting (AGM).

HUL will continue to take price hikes of its products even as market growth has moderated as inflation continues to remain high.

“The level of inflation is such that we will have to raise prices.

“When that’s required, we do it in as calibrated manner as possible… and we will continue to do so,” Nitin Paranjpe, chairman of HUL, told shareholders at the AGM.

The company had already warned investors post its January-March earnings that its margins will decline in the short term.

However, Parle Products category head Mayank Shah said that it will not resort to further price hikes as raw material prices have cooled off.

The company took its last price hike this quarter.

Harsha V Agarwal, managing director, Emami, said a correction in input costs will help the company but it will wait for commodity prices to stabilise before taking any pricing action.

He added that the company has to assess the situation properly.

“Any stability in prices is good for the industry. With demand creation, consumers will have more in hand, which they can spend on discretionary items,” he said.

In May, FMCG companies saw urban and rural demand decline compared to April because consumers tempered purchases while firms focused on increasing prices.

During the month, FMCG sales went down 16.5 per cent in value terms, according to Bizom’s data.

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