Margins still under pressure: FMCG price hikes to stay, as firms continue to feel cost impact

Emami, the maker of Boroplus and Navratna oil, said the company took a 4-5% blended average price increase during the quarter. Rajesh Sharma, president (finance and investor relations), Emami, said, “We expect our average price increase in the range of 4-4.5% for the full financial year as well.”

Margins still under pressure: FMCG price hikes to stay, as firms continue to feel cost impact
However, despite the price increases, margins will continue to remain under pressure since price hikes do not match commodity inflation and companies are forced to absorb some of the increase, lest they lose out on demand and volumes. Also, there will be some roll-over price increases, with companies continuing to hold high cost inventory.

Fast moving consumer goods (FMCG) companies will continue to take price increases for the better part of the current financial year, as the decline in prices of palm oil and other commodities is yet to reflect in their raw material costs.

However, despite the price increases, margins will continue to remain under pressure since price hikes do not match commodity inflation and companies are forced to absorb some of the increase, lest they lose out on demand and volumes. Also, there will be some roll-over price increases, with companies continuing to hold high cost inventory.

“Inflation has further worsened in the June quarter and prices of many commodities are at a decadal high. Looking ahead, in the near term, growth will be price-led, as inflation continues to impact consumption,” Sanjiv Mehta, CEO and managing director, Hindustan Unilver (HUL), said in an analyst call after its June quarter earnings.

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Mehta said the company’s net material inflation (NMI) as a percentage of total material costs in the June quarter was about 20%, which was on top of the 9% inflation seen in the quarter. While the correction in palm oil prices happened in the last weeks of June, the company continues to hold high-cost inventory.

“With consumption of this inventory in the September quarter and many commodities like crude oil, caustic soda, and plastic remaining at elevated levels year-on-year, September NMI will be higher than June quarter. We will continue to extensively drive productivity improvement in our business and take calibrated pricing action,” Mehta said.

“We think inflation will not abate at least in the second quarter,” Mohit Malhotra, chief executive officer, Dabur, told analysts. He said while the third quarter onwards commodities may soften, “there will be a roll-over price increase impact happening in the third quarter”.

He said the company has already taken a 6-6.5% price increase in the quarter ended June, which is nowhere close to mitigation of 9-10% inflation, while the rest is reflected in gross margin compression of around 220 basis points. However, the company’s margins could improve in the second half of the year with expectations of inflation softening and price increases coming in.

Britannia, which took a 20% price increase between September 2021 and March 2022, it will take another hike of 10% in the second quarter of the financial year, after which the biscuits and bakery manufacturer may give it a pause, depending on the inflation trajectory. “By Q2 we would be almost where we would want the pricing to be. And we will also be able to understand where the inflation story is going,” Varun Berry, managing director, Britannia Industries, said in a call last week.

Inflation pressures were at a peak in first quarter across key commodities; wheat flour saw a 20% sequential inflation, while palm oil and packing material also saw 5-7% inflation quarter-on-quarter, Jefferies wrote in a report on Britannia. “Company’s management quantified the inflation impact in Q1 at Rs 1.8 billion (Rs 180 crore) and feels Q1 marks the inflation peak. Price hikes will continue and will cover good part of inflation by Q2FY23,” the brokerage said.

Emami, the maker of Boroplus and Navratna oil, said the company took a 4-5% blended average price increase during the quarter. Rajesh Sharma, president (finance and investor relations), Emami, said, “We expect our average price increase in the range of 4-4.5% for the full financial year as well.”

Marico, meanwhile, has passed on three price reductions in the last two months, with edible oil and copra prices on a decline. However, with the company still holding high-cost inventory, it expects margins to remain under pressure for the second quarter, with some improvement coming in from the September quarter.

“We have seen visible recovery in gross margins over the last four quarters, but Q2 will be tricky as the benefit of falling edible oil prices will not flow through as we are carrying higher cost inventory of vegetable oil, while we pass on value to the consumers in pricing immediately ahead of our cost structure,” said Saugata Gupta, managing director and CEO, Marico.

“Around 50% of the raw basket is witnessing a deflation. Hence, Marico is less impacted by inflation versus its peers. The management said it will be able to maintain its FY23 margin guidance, even with increased advertising and promotional spends,” said analysts at Motilal Oswal.

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