Cost inflation concerns may haunt FMCG investors

Analysts said prices of key commodities for consumer firms such as copra, edible oil, palm oil, crude oil and packing materials have risen between 30% and 80% in the September quarter alone. With no quick resolution to the supply-chain crisis, commodity prices are unlikely to soften anytime soon. This threatens to reduce the gross margins of fast moving consumer goods (FMCG) firms.

Analysts at Yes Securities Ltd in a report on September 27 said, “While most of the managements had expected a moderation in commodity prices over the next three months during the 1QFY22 earnings call, it is expected to re-emerge with inflation re-emerging in commodity prices.” The scenario hasn’t played out.”

“The major reasons for the same are the rise in COVID-19 cases (which) are disrupting the supply of raw materials globally, shortage of containers for logistics, increasing packaging costs as the prices of copper, aluminum and crude oil are rising. Moving towards. Strong demand during the festive season could put pressure on companies to balance volume and price growth. All these factors make up the case for decline in earnings for most (FMCG) names mainly on the margin front.”

Of course, consumer firms are trying to protect their gross margins with price increases, but since this is being done in a calibrated manner, it will take some time for earnings performance to reflect that.

“Companies have continued to increase prices so far in 2QFY22 to tackle input cost inflation. HUL (Hindustan Unilever Limited) hiked calibrated prices by around 7-8% till 4QFY21 and after continuing inflationary pressures, it hiked prices by around 3% across its skin cleansing, laundry and tea portfolio in 1QFY22 As HUL has not witnessed further inflationary pressures on a sequential basis in 2QFY22, analysts Nirmal Bang Securities said in a report, it appears to have taken further pricing action. is of.

Analysts say that despite these measures, given the expensive valuations of consumer-focused stocks, the stocks may see underperformance in the near term.