Cost inflation worries could come back to haunt FMCG investors

Inflation in commodity prices, which began to ease in August, is strengthening again. With the continuing problems in the global supply chain, fears of high inflationary pressures resurfaced.

Prices of essential items for consumer businesses, such as copra, edible oil, palm oil, crude oil and packaging materials, rose 30% to 80% in the quarter alone September, analysts said. Without a quick fix in sight to the supply chain crisis, commodity prices are unlikely to decline anytime soon. This puts the gross margins of fast-turning consumer goods (FMCG) companies at risk of erosion.

“Although most management expected commodity prices to fall over the next three months during the 1QFY22 earnings calls, this scenario did not play out with a resurgence of price inflation. commodities, ”analysts at Yes Securities Ltd said in a Sept. 27 report.

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The pinch of costs

“The main reasons are the surge in covid-19 cases (which) disrupt the supply of raw materials around the world, the shortage of containers for logistics, packaging costs have increased as copper prices, aluminum and crude oil are increasing and Strong demand during the holiday season can push companies to balance volume and price growth. All of these reasons point to declining profits for most names (FMCG), primarily on the margin front. “

Of course, consumer companies tried to protect their gross margins with price hikes, but since this is done in a calibrated fashion, it would take some time to be reflected in profit performance.

“Companies have continued to take phased price increases during fiscal year 2QFY22 to date to combat input cost inflation. HUL (Hindustan Unilever Ltd) took calibrated price hikes of around 7-8% until 4QFY21 and after continued inflationary pressures executed another round of nearly 3% price hikes in the portfolios of skin cleansing, laundry and tea at 1QFY22, “Nirmal Bang Securities Analysts said in a report. He added that although HUL has not seen new inflationary pressures on a sequential basis at 2QFY22, it appears have taken new pricing measures.

That said, given the high valuations of consumer-focused stocks, despite these measures, stocks could experience short-term underperformance, analysts warn.

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