With commodity prices peaking out, major FMGC players, including Parle Products, Godrej Consumer Products and Dabur expect a recovery in demand in both rural and urban markets going forward aided by price stability.
Moreover, FMCG makers can look forward to better gross margins by the last month of Q2FY23 on a year-on-year basis, as there is a lag of around two months in their inventory coupled with forward contracts, experts say.
Prices of commodities have now peaked out and there has been a 15-20 per cent decline from peak prices in most commodities, according to Parle Products Senior Category Head Mayank Shah.
“This has brought some respite to FMCG companies, whose margins were affected by high inflation. Since most companies stagger price hikes and take them in a phased manner, we will not see any further price hike or package weight reduction which was in the offing. Despite price hikes taken by FMCG companies, the total increase in input cost was not factored in,” Shah told PTI.
While prices of commodities have seen a decline in the last few days, they are still very high compared to a similar period last year, he said.
“Hence at best we will see no further price hikes. The price stability will help in the recovery of the market, both urban and rural since inflation and price hikes were a major concern,” Shah added.
Expressing similar views, Edelweiss Financial Services Executive Director Abneesh Roy said crude oil price is at a one-month low and packaging cost, which is a significant raw material input for all FMCG companies, is linked to crude oil prices.
When asked about margin expansions, he said in “Q2FY23 there will be some benefit, not major as there is a lag of 2-3 months given there will be inventory, forward contracts. So a big expansion will happen in H2FY23.”
“In Q2FY23, in the last month of September, we should start to see the benefit for companies like HUL, Britannia, Nestle, and GCPL as they use palm oil. For the rest of the companies, further crude oil price correction is important as that will benefit packaging cost,” Roy added.
Besides, he said the depreciation of the Indian rupee against the US dollar also needs to be factored in as most of the raw material is imported.
Godrej Consumer Products Ltd (GCPL), the FMCG arm of Godrej Group, expects a recovery in consumption and gross margins in the upcoming quarter.
“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 recovery in consumption and gross margins in the upcoming quarter,” said GCPL in its quarterly updates for Q1FY23.
GCPL owns brands including Godrej No 1, Ezee, Good Knight, Cinthol, Hit and Protekt.
Similarly, Marico, which has popular brands as Saffola, Parachute, Kaya and Hair & Care, said prices of key inputs as copra remained soft during the quarter.
Moreover, edible and crude oil prices cooled to some extent towards the end of Q1FY23, but the company consumed higher cost inventory in this quarter.
“We expect operating margin to expand, leading to reasonable operating profit growth on a Y-O-Y basis. The effective tax rate (ETR) will be higher by 250-300 bps in FY23 due to the expiration of fiscal benefits in one of the manufacturing units. Therefore, net profit growth is expected to lag operating profit growth,” said Marico in its update on the operating performance and demand trends witnessed during the quarter ended June 2022.
The company maintains its aspiration of delivering sustainable and profitable volume-led growth over the medium term, enabled by the strengthening brand equity of its core franchises and scaling up new engines of growth, said Marico.
Another player, Dabur said it continues to target higher than industry growth on a medium to long-term perspective with “stable margins”, although there are near-term inflationary pressures.
“In spite of high inflation and near-term consumption pressure, the company will continue to invest behind power brands, innovation, distribution expansion and a strong back end which will help us drive long-term sustainable growth of the business,” said the quarter updates from Dabur.
Last week, leading FMCG makers in the updates had said the domestic FMCG industry continued to be “hit hard by inflation levels” leading to successive price hikes as well as impacting volumes during the three months ended June.