Price Hikes Continue To Temper Volumes, Erode Margins Of Consumer Firms In Q1

The first quarter of FY23 may fail to bring any respite for fast-moving consumer goods makers who are struggling to maintain profitability. Steep price increases are already tempering demand and squeezing margins.

India’s largest consumer goods maker Hindustan Unilever Ltd., Dabur Ltd., Nestle India Ltd., Britannia Industries Ltd., and ITC Ltd., among others, have warned that price hikes would persist to offset unprecedented raw material inflation, crimping household budgets.

Consumers are already opting for lesser quantities and small packs of groceries to soaps, hoping for prices to cool down. That comes as multiple rounds on hikes to offset input inflation have turned everything from staples to soaps costlier in the past year.

According to the FMCG companies, first-quarter growth will primarily be price-driven with steady volumes expected to return in the second half of the fiscal. Margins, too, are projected to remain under pressure, the companies indicated in their presentations after the fourth quarter results.

Hindustan Unilever has been forced to opt for grammage reduction in 30% of its portfolio, which consists of packs that operate at “magic price points” of Re 1, Rs 5 or Rs 10, Sanjiv Mehta, chairman and managing director, HUL, told analysts in a recent post-earnings call. “As a result, even the same number of units sold leads to a volume decline.”

While commodity prices are expected to taper off as the geopolitical crisis settles down, “it’s very difficult to put our finger on when this will happen,” Mehta said. The owner of Surf Excel brand expects a “decline” in margins in the short-term as price versus cost gap increases.

Biscuit maker Britannia also relies on Rs 5 and Rs 10 packs that help buyers stay within tight budgets and prevent downtrading to cheaper products.

“Consumers sometimes just have Rs 5 to spend, and if we do not provide them that then they will move to some other products,” Varun Berry, managing director at Britannia, said in a post-earnings call. “However, there is no way that any other activity can fulfill the pain that inflation is going to give us. It will have to be a price correction.”

According to him, about 65% of the price hikes had come through weight cutting in fourth quarter ended March. In the ongoing first quarter of FY23 ending June, it might end up being higher than that.

A further decline in volume or the number of packs sold comes on the back of a 4% drop for the fast-moving consumer goods sector in the three months through March, and 2.6% contraction in the December quarter, with rural areas slowing down more than urban ones, according to Nielsen data.

Marico’s Managing Director Saugata Gupta said that while the near-term demand outlook is uncertain, the second half of this year should look better.

Factors such as a good monsoon and rabi harvest, higher agri commodity prices boosting farmers’ income, and if the government spending of Rs 7.5 lakh crore on capital expenditure is front-ended, could contribute to rural recovery, Gupta said during an earnings call.

He expects margins to remain subdued in the near term, although there is a degree of comfort for Marico given that copra prices should remain benign throughout the year as it constitutes half of its raw material basket, he said.

“Overall, we are hopeful of coping with all the stress factors in Q1 and get into a rhythm, when things start easing out from August-September because of base correction as well as relative demand and input cost stability."

Suresh Narayanan, chairman and managing director, Nestle India Ltd., also hinted that the pressure on margins is yet to bottom out. “Continued inflation is likely to be a key factor in the short to medium term.”

Inflation on Fire

Consumer goods companies have braved record inflation in most of their raw materials, with some hitting even 20-40-year highs.

Prices of oil palm have risen 61.4% year-on-year as on May 23, Brent crude is up 66.4% and local sunflower oil costs 11% more, according to the Bloomberg commodity index.

Prices of palm oil, however, are set to ease after Indonesia decided to lift the export ban on the commodity.

Within agricultural commodities, the price of wheat jumped 24% year-on-year in April, sugar rose 6%, and domestic liquid milk spiked 26%, as per data from Kotak Institutional Equities.

The prices of chemicals such as soda ash, caustic soda, and high-density polyethylene used in soaps and detergents also rose 72%, 119% and 6%, respectively, over a year earlier in April.

These increases were reflected in the prices of packaged consumer goods, with soaps and edible oil accounting for the steepest hikes, followed by biscuits.

“Incessant price hikes to offset unprecedented raw material inflation is the theme for 2022 across categories,” Jaykumar Doshi, senior vice-president-equity research at Kotak Institutional Equities, said in a recent note.

“Inflation in edible oil, palm oil, crude oil is negative for Hindustan Unilever, Godrej Consumer Products, Marico and Britannia Industries, while rising wheat and milk prices can hurt ITC and Nestle, among other companies,” the note said.

Inflation in crude and derivatives also implies higher packaging costs for all companies, Doshi said.

Higher costs are weighing on companies' profitability. Nestle India reported a decline in net profits in the quarter ended March despite price hikes and cost cutting, implying that even large companies aren’t immune to inflation.

Analysts predict the worst is not yet over.

Amnish Aggarwal, director-research at Prabhudas Lilladher, estimates a 12.4% profit after tax compound annual growth rate over CY21-23 for Nestle.

“We factor in the Ebitda margin decline of 140 basis points in CY22 (40 bps over CY21-23) as scale efficiencies, mix and pricing actions won’t be able to neutralize 10-year high inflation,” Aggarwal said.

Bigger Brands Gaining From Chaos

It’s not all bad news though. Two of the crises--Covid-19 and exceptional inflation--have benefited bigger brands.

The pandemic resulted in a trend where customers were ready to pay a premium for bigger brands that assured quality and hygienic standards.

Larger companies also gained a significant market share at the cost of smaller players struggling to keep themselves afloat amid persistently elevated inflation.

• HUL saw the highest market share gains in more than a decade.

• Dabur has seen market share gain in nearly 99% of its businesses.

• Godrej Consumer Products Ltd. has gained market share in 85% of its portfolio.

• Britannia also saw "decade-high share" in the biscuits segment.