Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
What lower inflation means to FMCG players? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Nov 19, 2008

    What lower inflation means to FMCG players?

    The latest statistics on inflation showed that the same has cooled off to a 6-month low and come down to single digits, primarily thanks to lower commodity prices. Since FMCG companies play a major role in driving consumption growth, which is necessary for a slowing economy, we analyse what kind of impact the inflation number can have on the FMCG sector.

    As seen from the table below, the major input prices for the FMCG companies have declined from their peak rates, though some are yet higher on the YoY basis. The FMCG companies had been witnessing margin pressure right from the beginning of this year. The companies had implemented various options like price hikes, cost saving techniques like change in product mix, reducing the pack sizes and better sourcing of raw materials to offset the input cost impact.

    Lower input prices
    Input Change from peak rate* Change on YoY basis*
    Groundnut oil -14.5% -7.0%
    Sunflower seed oil -25.7% 5.2%
    Coconut oil -4.8% 33.5%
    Palm oil -40.8% -25.6%
    Sugar -3.1% 26.5%
    Wheat flour -45.5% -41.8%
    Crude oil (Brent) -45.5% -41.8%
    LAB (used for soaps) -16.0% 50.0%
    Sorbitol -11.0% 25.0%

    *latest price as on 31st 0ct 08
    Source: CMIE

    However during the September quarter, on account of fear of lower volumes, the companies had restricted taking further price hikes thereby leading to decline in operating margins. The combined margins of large companies (HUL, Nestle, Dabur, Marico, Britannia and Godrej Consumers) declined by 2% on a YoY basis for the September quarter. During our interaction with them, the management of these companies had cited that the commodity prices are to remain a challenge going forward and expected a slowdown in growth if the trend continued.

    The raw material prices accounted nearly 54% of the sales in the last quarter, which was considerably higher than the previous quarters. Hence, the recent correction in some of the key raw material prices comes as good news to these companies. Players present in soaps, shampoos, detergents and toothpastes have signaled that they will not raise prices in the next 6 to 12 months because of input costs coming down considerably. However, firm agri commodity prices are likely to continue pressuring the food companies.

    Margin expansion
    FMCG players are, however, not likely to reduce prices in the near term, as there is considerable amount of stock in the trade channel at any given point. If prices are reduced immediately, companies have to compensate all the market stocks, making it very complex. Hence easing cost pressures combined with retention of pricing power could lead to marginal upside in operating margins.

    Improved cash flows
    Though the FMCG companies have a strong balance sheet, the improvement in margins would further give a boost to the cash flows. While companies in other sectors are struggling for working capital, FMCG companies are comfortably placed. This would help the companies to look at inorganic growth opportunities. Indian FMCG companies have made global headlines by acquiring international companies and brands in the last few years. With signs of slowing demand worldwide, companies like Godrej Consumer Products, Tata Tea and Dabur are looking at acquiring new brands, tweaking promotion spends and expanding distribution network to mop up more sales. This could now get a further boost as more companies could be up for grabs at better valuations. It would also provide them opportunity to enter new growth areas or pay higher dividends to the share holders.

    To conclude...
    The FMCG companies had witnessed higher sales growth in inflation environment indicating resilience of consumer spends on FMCG. Rural income and sentiments (rural consumers account for 50% of FMCG consumption) are on an uptick due to food price inflation, farm loan waiver, satisfactory monsoon and employment generation schemes. Hence the long term fundamentals of the sector, both in terms of breadth (number of consumers using) and depth (existing consumers) continue to remain strong.

    With the cooling of the commodity prices, FMCG companies have further reason to cheer. Products with high brand loyalty in categories like coconut oil, oral care, skin care products would benefit with the reversal of commodity prices on account of lower competition. However, the hair and soap segment and biscuits may witness only a marginal improvement due to intense competitive environment.



    Equitymaster requests your view! Post a comment on "What lower inflation means to FMCG players?". Click here!


    More Views on News

    Marico: Earnings Hit by Lower Volumes and Firming Input Prices (Quarterly Results Update - Detailed)

    Aug 9, 2017

    While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.

    P&G: Strong Core Growth (Quarterly Results Update - Detailed)

    Dec 9, 2016

    Procter & Gamble Hygiene and Health Care has announced the first quarter results of the financial year ended June 2017 (1QFY17). The company's sales rose by 12.5%YoY while net profit rose by 50.1% YoY during the quarter.

    Nestle India: Sales Traction From New Products (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.

    GSK Consumer: Price Hike Hurts Volumes (Quarterly Results Update - Detailed)

    Nov 30, 2016

    GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.

    Marico: Margin Expansion Drives Profit Growth (Quarterly Results Update - Detailed)

    Nov 28, 2016

    Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 16, 2017 (Close)