Surging crude oil prices as a result of the ongoing conflict across West Asia continue to be one of the biggest concerns for India. The impact is manifold. Not only were the fuel prices increased after 4 years, but there were two rounds of price hikes in a matter of 7 days. How would this impact consumer products?
The fuel price hike could potentially impact input costs for FMCG manufacturers. Analysts believe FMCG companies may face margin pressure due to increasing input costs, as a result. The costs may also weigh on the demand outlook.
Companies may pass on rising costs to consumers
Most FMCG sector analysts believe that some amount of the cost could be passed on to consumers.
Neel Mehta, Research analyst at DRChoksey FinServ said that price hikes across FMCG categories appear increasingly likely. “Companies may initially rely on calibrated pricing actions, grammage reductions, supply chain optimization, and cost-saving measures to protect margins. However, beyond a point, passing on inflation becomes inevitable,’ Mehta said.
However, Amit Purohit, vice president of Elara capital said that while consumer mat face inflation due to the crude and petrol hike FMCG companies could get the benefit in terms of operating leverage. “While higher crude price does help in better sales growth due to price hike taken by companies. This should provide some operating leverage as sales growth improves.”
Highlighting the risks, Neel Mehta of DRChoksey FinServ said FMCG companies may face near-term pressure on both fronts — margins as well as demand.
Margins under pressure
Crude-linked inflation affects multiple cost heads across the FMCG value chain, including packaging inputs such as HDPE and other derivatives, transportation and logistics costs, warehousing expenses, and overall supply chain economics.
“This creates broad-based pressure on gross margins, particularly for categories operating on high volumes and relatively thin pricing flexibility,” Mehta added.
Inflation may impact demand growth, disposable income
On the demand-side risk, Mehta said that persistent inflation as a result of the fuel price hike and increasing essential expenses reduces disposable income. Particularly in rural and lower-income segments, inflation is likely to impact volume growth for discretionary and mass-consumption categories. “Therefore, the sector may witness a phase where revenue growth remains supported by pricing, while underlying volume growth stays relatively subdued,” he added.
Large FMCG firms to gain, smaller players under pressure
Analysts believe that large FMCG companies are better placed compared to smaller regional.
“We expect market share gains for large players in the near to medium term,” Purohit said.
Mehta of DRChoksey FinServ reiterated the point and said that “large players typically have stronger balance sheets, better backward integration, superior procurement efficiencies, and greater pricing power, enabling them to absorb short-term cost shocks more effectively.”
“Smaller players, on the other hand, generally have limited ability to sustain prolonged margin pressure, which could eventually lead to loss of competitiveness and market share consolidation in favour of larger incumbents,” Mehta added.
Conclusion
Crude prices have already triggered phased fuel price hikes. Analysts believe FMCG companies may also pass on the pressure from rising crude and fuel costs to consumers. The continued volatility could push the FMCG sector into a phase of pricing-led growth, while demand recovery may remain under pressure due to rising inflation and weaker disposable income.