Consumer Staples - High Inflation Due To Supply Chain Woes, Ukraine Crisis Weigh On Earnings: Yes Securities

Although most managements had expected commodity prices to come off over the next three months during Q4FY21 earnings calls, that scenario has not played out with inflation resurfacing again in commodity prices post Russia‐Ukraine crisis and series of commodity export bans by Indonesia and other countries.

The key reasons for the same are ‐ 1) China’s complete zero Covid policy leading to lockdowns and manufacturing and supply chain disruptions 2) Shortage of containers for logistics 3) Packaging costs have been on the rise as prices of crude oil are moving upwards and All these reasons put pressures on margins front.

Most companies have already taken a series of price hikes in last couple of quarters while further inflationary pressures will require more price hikes in H1FY23. In our view, even at the risk of ongoing rural slowdown and fall in Urban demand due to muted consumer sentiment, we expect companies to keep up with price hikes to protect their margins as they have already upped marketing and distribution investments.

In this backdrop, we expect the staples basket to underperform in the near term given multiples remain elevated and advise being stock specific. We retain our preference for ITC, Marico in large‐caps and Emami among mid‐caps where we find further scope for rerating and hence outperformance over peers.