The easing of commodity prices will help the fast moving consumer goods companies (FMCG), reeling under acute rising input cost, as they would no longer feel the pinch of shrinking margins, which his likely to improve from the third quarter onwards. According to financial services company, Motilal Oswal, stable product prices will expand profit margins for Hindustan Unilever Ltd (HUL), which has the largest consumer product basket, Godrej Consumer and Asian Paints in the coming quarters.
?The gross margin of FMCG companies under our coverage declined by 184bps during Q1 FY09. The decline in input cost and price hikes is likely to expand gross margins QoQ from 3Q FY09 due to the lag effect, ? Motilal Oswal said.
Besides, firm prices of agri-based inputs can sustain margin pressure for the leading fast moving consumer goods companies like GlaxoSmithKline Consumer, Britannia and Nestle in the immediate term, the financial services company added. According an industry analyst, the price of copra went up by 30% y-o-y. Over the past few months, crude oil prices have dropped by 32 % while palm oil prices have seen a slide of 30%.
?Commodity prices are coming down and if this remain stable at this level then in the next couple of quarters we might see operating margin expansion. If FMCG companies benefit from this trend we might look at price cuts and the companies would focus on volume growth,? Anand Shah, an analyst at Angel Broking said.
HUL?s operating profit margins at 14.1% in the June quarter of the current fiscal compared to 14.2% in the corresponding quarter last year, came under pressure, while net profit margins slipped to 13.2% (14.2%). The pressure was due to inflationary pressure, with costs of raw materials and packaging materials going by 23%. Motilal Oswal further said, however, the fast moving consumer goods company may witness price reduction in select categories like toilet soaps, given the recent decline in input cost (crude oil derivatives) and rising competitive intensity.
The FMCG companies went for an increase in the price of soap by 8-10% over the last six months. HUL went for an increase in the price of toilet soaps category by 10% over the last six months. Reeling under acute rising input cost, ITC Ltd recently raised the price of its brand ?Vivel? by 5%.