Relief in crude oil prices boosts FMCG, but for how long?

This provides relief to fast-moving consumer goods (FMCG) companies, albeit less, as prices remain higher than last year. Higher oil prices increase the packaging and freight costs for the FMCG sector and are therefore not desirable. Prices of palm oil, another key input, are also below recent peaks but up year-on-year (year-on-year).

“The correction in Brent crude prices and the recent high in palm oil prices in 2022 has brought relief to FMCG companies. Yet, year after year, commodity cost pressures persist. Here, companies that have higher indexation for palm oil and crude will be adversely affected, such as Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL),” said Alok Shah, an analyst at Ambit Capital.

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A report by IDBI Capital Markets and Securities Ltd said soap, shampoo, detergent, biscuits and edible oil categories are the worst hit due to input cost inflation.

For HUL, the soap and detergent portfolio, which forms a major part of its revenue, is exposed to risk due to its dependence on palm and crude derivatives. GCPL’s soap business will also suffer. Shares of the firm rose 5 per cent this week, while those of HUL remained flat. Shares are down 23% and 11%, respectively, so far in 2022.

According to Kotak analysts, Dabur India, Marico, Nestle India and Britannia Industries are marginally affected by cost inflation.

Margin pressure for the sector had already increased in the December quarter (Q3FY22). Obviously, for some time now, FMCG companies have been increasing prices to fight cost pressures. These price hikes are expected to support margins in Q4 FY22. However, based on the behavior of raw material prices, margins remain at risk as we enter FY13, posing a downside risk to earnings estimates for the year. Some analysts have already cut expectations.

As such, times of stress due to rising costs become important as the current demand situation is not particularly upbeat. Given the uncertainties, it is difficult to assess the exact impact on margins or volumes.

Analysts at Kotak Institutional said, “It is difficult to accurately assess the earnings impact due to multiple moving parts, unprecedented inflation and volatility, price rise in a weak demand environment, demand destruction due to widespread inflation in goods/services and competitive intensification. ” Equity in a report on March 11.

Needless to say, the input cost trajectory is critical for monitoring. It is also important to observe what happens to demand when companies further increase prices. So, what the management says while declaring the Q4 results will be important.

Meanwhile, valuations are comparatively low. Bloomberg data shows HUL, GCPL, Britannia, Marico and Dabur trade at 47x, 36x, 42x, 45x and 46x, respectively, of FY13 estimated earnings. But unless raw material prices are largely correct, near-term concerns could lead to a meaningful bounce.

“Investors are looking forward to a Goldilocks scenario of high growth (demand) and low inflation. In rural areas, a good monsoon weather can help. For now, optimism is low and earnings risks have increased,” Shah said.