Red Sea Crisis Not A Threat For Consumer Sector Yet, But Can't Ignore Risks: Analysts

Outlook on domestic wholesale prices also hint towards rising input costs.

<div class="paragraphs"><p>Representational image. (Photo by Ranjith AR on Pexels)</p></div>
Representational image. (Photo by Ranjith AR on Pexels)

It has been nearly four months since the Red Sea crisis has been in focus, and market participants have not completely ruled out the risks to Indian companies, including those in the consumer sector.

Although the direct impact of the crisis is likely to be limited—except for the rising freight costs—major supply chain constraints in key markets can lead to a spike in commodity prices, subsequently inflating prices in India. 

Consumer companies can see traces of input cost inflation due to rising freight costs, according to analysts. . However, they see no major impact on the performance of consumer companies.

Domestic prices of edible oils might see an uptick as they are influenced by international pricing, said Ajay Thakur, research analyst at Anand Rathi Share and Stock Brokers Ltd. That way, the prices of biscuits, atta and noodles will rise, he said. 

However, palm oil prices will not see any major impact, as the majority of its imports are from Malaysia and Indonesia, away from the affected trade route, Thakur said. 

In the long run, "rising commodity prices might impact margins (of fast-moving consumer goods companies)", said Ruchit Jain, lead research analyst at 5paisa Capital Ltd. 

The outlook on domestic wholesale prices also hints towards rising input costs. The domestic wholesale price index—an indicator of wholesale prices—is expected to notch higher to 3–3.5% in fiscal 2025 from 0.73% in December, and economists blame geopolitical tensions around the Red Sea for it.

The WPI is expected to move in positive direction during the next quarter due to a hike in global food and commodity prices, and the Red Sea crisis will lead to supply chain constraints, said Dharmakirti Joshi, chief economist at Crisil Ltd.

In line with Joshi's view, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank Ltd., said that inflation in wholesale prices of primary articles is expected to elevate in the next financial year due to erratic weather conditions across the globe and an "adverse base effect" from the previous year.

Apart from inflating input costs, the Red Sea crisis is also expected to offset the performance of rice miller companies. The impact of the Red Sea crisis will be company-specific, said AK Prabhakar, head of research at IDBI Capital. Rice producers like KRBL Ltd., which exports to Gulf regions, will be affected, while companies such as LT Foods Ltd., whose majority exports are to North America, will not see a major hit, Prabhakar said.  

The crisis will have a bearing on exports of basmati rice, he said. 

However, Ashish Jain, chief financial officer at KRBL, maintained his initial stance on the Red Sea crisis and foresees a limited impact on the company's operations.

"We have explained earlier that it (Red Sea crisis) doesn't really have any impact on us because it has more of an impact on exports to Europe. However, the bulk of our exports head to the Middle East, therefore having a very limited impact," he said. 

Analysts said that sentiment for rice stocks is also dented due to uncertainties around the Red Sea. Rice stocks have underperformed the broader market due to the Red Sea crisis, Jain said.  

"The Red Sea crisis might affect the top line of these companies; that is why there is no major buying interest seen in rice stocks," he said. The top-line growth for rice companies will be delayed, and "it may take time for exports to pick up", according to him.

As of Feb. 1, shares of rice millers and exporters such as KRBL and GRM Overseas Ltd. were 2.3% and 1.9% lower, respectively, from the closing price of Oct. 20, a day after the conflict in the Red Sea started. This is against the 22% and 20% gains seen in Nifty MidSmallCap 400 and Nifty MicroCap 250, respectively, during the same period.

Shares of Daawat-owner LT Foods Ltd. and Chaman Lal Setia Exports Ltd. gained almost in line at around 16% and 18%, respectively. Jain expects further consolidation in fast-moving consumer goods companies. 

However, market participants added that the impact of the Red Sea crisis on Indian companies cannot be clearly determined amid the ongoing uncertainty and is subject to future developments around the crisis.

Red Sea Danger Is Spurring Global Oil Buyers To Go Local