ITC to HUL, Nestle: What rising sugar, crude oil, copra prices mean for FMCG, paint and consumer companies

FMCG margins likely to remain under pressure in September quarter 

According to the report, margins will stay under pressure in the September quarter. Companies took price hikes in the June quarter, and those hikes will show up as sales growth. But the hikes were lower than the pace of input cost inflation, the report noted.That mismatch is expected to weigh on both year-on-year and sequential margins in the second quarter.

There is a precedent for this pattern. Raw material prices had spiked sharply in the fourth quarter of the last fiscal year, driven by the Middle East conflict. Yet margins barely felt it in the first quarter of this fiscal year. The reason, according to the report, was low-priced inventory that companies were still running through their books and that cushion is now wearing off.

The picture is expected to improve from the third quarter onward, once the full effect of the price hikes taken earlier in the year works through company books, as per the report.

Sugar, crude oil and HDPE prices push up FMCG input costs 

Sugar prices rose 16% month-on-month in August and are now up 18% year-on-year, the report noted. Tight near-term availability and festive season demand pushed prices higher, though government measures such as duty-free imports have started to ease them slightly from their peak.

The sugar spike is expected to pressure margins at Britannia, Nestlé, Dabur, ITC and Hindustan Unilever, all of which use sugar heavily in their food and beverage portfolios, the report noted. Britannia has already responded by taking an additional 2% price hike, effective September quarter, on top of the 1% price hike taken earlier. 

Brent crude and HDPE prices also remain a concern. Both are volatile and were up 10% and 3% cent month-on-month respectively, with year-on-year increases running as high as 42% for HDPE, the report said. Furthermore, the report noted that this is likely to drive up packaging costs across the consumer sector and increase input costs specifically for paint companies, even after the price hikes they have already taken.

Copra, the raw material behind coconut oil, rose again in August, up 14% month-on-month and 10% quarter-on-quarter. That takes away any near-term case for further price cuts. The report noted that for Marico, this works two ways. The rise negates pressure to cut prices further, which should support sales growth. But copra prices remain well below their year-ago and peak levels, down 33% and 34% respectively, which should keep supporting Marico’s margins and drive strong EBITDA growth, as per the report. 

Coffee, tea and gold prices offer some relief to consumer companies 

According to the report, not every input has turned against companies. Robusta coffee prices softened further in August, down 4% month-on-month and 8% year-on-year. As per Nomura, this to support margins at Nestlé and Hindustan Unilever, though Tata Consumer‘s unbranded coffee business may see less benefit since it typically has to pass on lower costs to customers.

Tea prices moderated 7% month-on-month, even though they remain up 13% year-on-year. According to the report, this could mean further price cuts by Tata Consumer and Hindustan Unilever are no longer needed, though the ongoing plucking season makes the margin impact uncertain for now.

The report further noted that gold has cooled off with an 8% fall from its peak and a 2% fall Q-o-Q, even as it is still up sharply year-on-year. This is good for jewellery retailers such as Titan, since softer gold prices tend to bring back footfalls and reduce the promotional spending jewellers need during high-price periods.

Milk, wheat and titanium dioxide prices have stayed largely range-bound, offering some stability to food companies, quick-service restaurants and paint makers, respectively, as per the report.

Britannia, Nestlé, Marico, HUL and Dabur: What Nomura expects 

On the positive side, besides Marico, the report highlighted  ITC, where falling leaf tobacco prices, down 10% year-on-year, should support margins. Tata Consumer is also seen benefiting from moderating tea prices and stable HDPE costs, even if its unbranded coffee business takes a hit.

Hindustan Unilever and Dabur are rated neutral by Nomura. Hindustan Unilever took a 5% price hike in the June quarter, which the report said should help it hold margins in a narrow range despite higher costs for linear alkyl benzene and crude derivatives. Dabur’s raw material basket is seeing only moderate inflation overall, according to the Nomura report.

On the negative side, Britannia and Nestlé face pressure from high sugar and packaging costs. Godrej Consumer Products is exposed to volatility in crude derivatives and palm oil, and took a 5% price hike in the June quarter. 

Colgate is likely to feel the pinch from rising maize and mentha oil prices, given its relatively higher exposure to packaging costs. United Spirits is expected to see higher glass costs weigh on gross margins.

Paint companies as a group are flagged as a weak spot for the September quarter, a seasonally softer period in any case. They raised prices by 12% in the June quarter, but cost increases outpaced that hike, the report said, which could keep near-term margins under strain.

Marico, Tata Consumer, Titan and United Spirits are Nomura’s top picks 

According to Nomura, companies with strong brands, resilient portfolios and pricing power can navigate a more volatile demand and cost environment. Companies with heavier exposure to crude and its derivatives are likely to see a bigger margin hit from high-cost inventory, the report said, while food companies should see a smaller impact from the September quarter onward.

Among staples, the brokerage’s top picks are Marico and Tata Consumer Products, both rated Buy. In consumer discretionary, it favours Titan and United Spirits, also both rated Buy.