Inflation Lurks Even As FMCG Chiefs Say Not To Worry Yet

India’s fast-moving consumer goods makers are potentially facing fresh risk due to high oil prices, even as they struggle with the existing pressure on margins and volumes.

Brent crude — the world's most traded oil benchmark—jumped 10.8% this quarter so far, surging past $90 a barrel. On Sept. 28, it jumped past $97 a barrel, the highest since November 2022.

And the market trackers fear that the rally might not stop there.

The resurgence of high oil prices could potentially hurt the margins of companies with higher exposure to crude oil and its derivatives, such as Asian Paints Ltd. It also threatens to spill over on those dependent on palm oil and its derivatives, such as Procter & Gamble Hygiene and Health Care Ltd., Marico Ltd., Hindustan Unilever Ltd., Godrej Consumer Products Ltd., among others. 

“The commodity pressures remain high," Gautam Kamath, group chief financial officer, India, at Procter & Gamble, said during the company's first-ever analyst meet.

A patchy monsoon, along with steep commodity prices, keeps the maker of Whisper sanitary pads and Head & Shoulders shampoo on its toes.

The second-largest consumer goods maker after Hindustan Unilever Ltd., with a combined revenue of Rs 15,000 crore, expects the bottom line to remain under pressure for at least three to four more quarters, with input costs seeing little signs of easing.

Kamath, however, isn’t overtly worried about volume growth, as the company is not seeing any renewed pressure on consumption yet. 

Companies including Adani Wilmar Ltd. also see little cause for worry at this point in time.

"If oil crosses $150 a barrel, then it will surely become a problem," Angshu Mallick, managing director and chief executive officer at Adani Wilmar, told BQ Prime. "One needs to wait and watch... But as of now, both domestic supply and imports are stable. The retail prices are also at their lowest levels, at least in the last five months, so I don't see any disruptions, at least during the festive season."

As crude prices climb, there is a push towards biofuels, which are produced using oilseeds. This raises demand for oil seeds, leading to a surge in the price of edible oil. 

However, Mallick warned that inadequate rains could impact the incoming crops, jacking up prices, the extent of which will be known by the end of October.

Others, like Parle Products Pvt., are having a hard time managing too many macroeconomic issues at the same time. 

The fresh risk from high oil prices aside, the country’s largest biscuit maker has voiced concerns over an uncertain rural recovery due to untimely rains and already high wheat and sugar prices. "One can probably tackle one issue, but if too many factors start playing out at the same time, it becomes extremely challenging," said Mayank Shah, senior category head at Parle.

The paint sector relies heavily on crude-based derivatives like titanium dioxide (TiO2-China), the prices of which are up 3.8% month-on-month, Bloomberg data showed. The prices of other paint inputs such as styrene, formaldehyde, and acrylic acid rose by 20%, 4%, and 5%, respectively.

Prices of palm fatty acid, a refined by-product of refined crude palm oil that is in soaps and cosmetics, have increased by 14.2% over the previous year, having declined for the past few quarters.

High-density polyethylene—used in the packaging of shampoos, soaps, detergents, hair oils, creams, and toothpaste, among other products—rose 1.9% sequentially. Among other crude-linked raw materials, the prices of liquid paraffin and copra, mostly used by companies selling hair oils, rose 2.4% and 8.3% month-on-month, respectively, according to Bloomberg data.

The surge in prices has caused Hindustan Unilever's commodity basket prices to rise sequentially, Motital Oswal Financial Services Ltd. said. It is still lower than last year, due to the high base influenced by the Russia-Ukraine war.

HUL refused to comment on BQ Prime's emailed query, citing the "closed period", following the release of its second quarter financials.

Any unwelcome pressure on input inflation, fuelled by the domino effect of rising oil prices, may force the makers of soaps-to-paints to abandon price cuts, according to analysts. That doesn't necessarily mean that prices will go up immediately, as companies do not want to upset the fragile demand.

"FMCG companies may reconsider their price reduction strategies, which they had implemented during the period of decreasing commodity prices, in response to the inflationary environment," said Motilal Oswal.

Price cuts were visible across categories such as hair oil, soaps, and edible oil as companies continued to pass on the benefit of falling input costs.

Consumers are already reeling under high sticker prices as companies dealing with the high cost of commodities such as milk, coffee, wheat, and sugar continue to raise prices in order to protect margins.

"Wheat and sugar prices have been critical," said Parle’s Shah. 

He, however, ruled out further hikes in MRPs immediately, due to renewed inflationary pressures, as the industry is largely focusing on reviving the dwindling volumes, given that the growth continues to be pricing-led.

Shah hinted that pricing actions could be initiated after the festive season.

"But we can expect lesser promotional intensity," he said. "Companies are likely to now pause passing benefits in terms of grammage reversal, with increasing input costs and also without government intervention."

In contrast to Britannia Industries Ltd.'s commentary about price cuts and grammage reversal during its first quarter earnings call, there has been no change in prices yet, possibly because wheat prices have gone up by 8% quarter-on-quarter. Arguably, the change in prices could reflect with a lag.

Analysts at Nirmal Bang Securities Pvt. expect margins of Britannia to remain under pressure in the near term because of the persistent inflation in wheat and sugar prices. Nestle India's Chairman and Managing Director, Suresh Narayanan, had also warned of elevated food inflation and that it could hurt its margins in the near term.