FMCG firms keep a wary eye out as input prices rise
The recent price increase in raw materials such as crude oil, palm oil, coffee and cocoa threatens to cast a shadow over makers of fast-moving consumer goods (FMCG), who have enjoyed a steady expansion in gross margins over the last few quarters.
However, the companies are unlikely to transfer these price increases on to consumers immediately, amid competitive intensity and the imperative to sustain sales volumes.
A report from BNP Paribas, issued on Tuesday, highlighted the concerns for the sector. “We observe that most raw material prices are seeing some inflation and few are largely range-bound over the past few quarters. The cooling of raw material prices had resulted in meaningful gross margin expansion for most companies under our coverage. We see the increase in prices in the current demand environment as a negative development for the sector.”
According to BNP Paribas, the phase of margin expansion is now a thing of the past, while revenue growth is expected to remain sluggish.
Analysts at the brokerage track monthly prices of over 150 FMCG items across 20 categories to ascertain pricing action and its likely impact on sales and margins.
Insights into the price movements of several key commodities reveal the breadth of inflationary pressures. For instance, crude oil prices rose 2% year-on-year in the March quarter.
Within agricultural commodities, maize price rose 3.9% year-on-year in the ongoing March quarter and 4.6% sequentially, worsened by anticipated demand surges and the government’s procurement plans for ethanol production, analysts at Motilal Oswal Financial Services said in a separate report released Tuesday.
Coffee prices jumped 15.3% yearon-year in the March quarter, with wheat seeing a 2.6% increase.
“After cooling off in the past few quarters, raw material prices have turned inflationary. As raw material prices deflated, companies had largely retained the benefits. Considering the competitive intensity, pressure on volumes and strong gross