FMCG Profits on the Line? Raw Material Costs Skyrocket for Some, Ease for Others! See Which Companies Face the Heat!

FMCG Raw Material Costs Present a Mixed Picture

A recent analysis by Equirius Securities reveals a complex and varied landscape for raw material costs affecting the Fast-Moving Consumer Goods (FMCG) sector. While some essential inputs are becoming more affordable, others are experiencing substantial price increases, creating a dynamic environment for company margins and strategies.

Easing Costs for Key Cereals

• The report indicates positive news for cereal-linked agricultural inputs. Wheat and rice prices have shown broad stability quarter-on-quarter, with year-on-year declines of 10 per cent and 1 per cent, respectively.
• Maize prices continued a significant downward trend, decreasing by 14 per cent year-on-year in the September quarter.
• Barley also contributed to this easing, posting a 4 per cent year-on-year drop.

Rising Prices and Persistent Volatility

• However, not all commodity trends are favourable. Sugar prices have moved counter to the broader easing, rising 8 per cent year-on-year due to output constraints.
• In the beverage sector, coffee prices have remained firm, with Arabica prices surging 18 per cent quarter-on-quarter and a notable 46 per cent year-on-year, driven by supply disruptions.
• Robusta coffee prices also saw an increase of 15 per cent quarter-on-quarter.
• Cocoa prices have extended their correction phase, down 8 per cent month-on-month and 26 per cent quarter-on-quarter.
• Tea prices remain subdued, experiencing a nearly 4 per cent year-on-year decrease.
• Edible oils continue to exhibit volatility. Copra prices remain elevated year-on-year, up 60 per cent due to production issues and festival demand, though they have eased from peak levels.
• Palm oil edged up 2 per cent quarter-on-quarter, while mustard, sunflower, and soybean oils stayed firm with year-on-year increases of 13 per cent, 11 per cent, and 6 per cent, respectively.

Dairy Softens, Packaging Costs May Drop

• Milk prices have begun to soften with the onset of the flush season, leading to improved supply across key producing regions.
• Skimmed Milk Powder (SMP) has also started showing early signs of easing.
• A further softening in crude oil prices is anticipated to aid in lowering packaging costs for FMCG companies.

Impact on Specific Companies

• The gradual easing in key cereals is constructive for companies such as Britannia Industries, Nestlé India, Mrs. Bectors Food Specialities, United Breweries, Tata Consumer Products, and ITC.
• Softer milk and SMP trends are expected to support margin recovery for Nestlé India, Zydus Wellness, Britannia Industries, Tata Consumer Products, and Hindustan Unilever Limited.
• The correction in palm oil and PFAD is an important monitorable for players exposed to edible oil price volatility.
• A softening crude oil and polymer basket is favourable for home and personal care companies including Godrej Consumer Products, Hindustan Unilever, Jyothy Labs, and Dabur India, as well as the wider FMCG universe, due to potential easing in packaging costs.

Impact

• The mixed raw material cost environment will directly influence the profitability and competitive positioning of FMCG companies. Investors can leverage these insights to assess which companies are better poised to manage costs and enhance margins, potentially leading to stock performance differentiation. The varied price movements will likely affect pricing strategies and consumer demand dynamics across different product categories within the FMCG sector.
• Impact Rating: 8

Difficult Terms Explained

• FMCG: Fast-Moving Consumer Goods – everyday items like food, drinks, toiletries, and cleaning products that sell quickly.
• Agri Inputs: Agricultural inputs or raw materials derived from farming.
• Q-on-q: Quarter-on-quarter, comparing a period to the previous three-month period.
• Y-o-y: Year-on-year, comparing a period to the same period in the previous year.
• Subdued: Lower than expected or less active.
• Output Constraints: Limitations or problems in the production process that reduce the amount produced.
• Arabica/Robusta: Different types of coffee beans, Arabica being generally higher quality and more expensive.
• Copra: Dried kernel of a coconut, used for its oil.
• Palm Oil/PFAD: Palm oil is a vegetable oil. PFAD (Palm Fatty Acid Distillate) is a byproduct used in various industries.
• Flush Season: A period when milk production is at its peak due to abundant grass and favorable weather.
• SMP: Skimmed Milk Powder, milk with most of the fat and water removed.
• Polymer Basket: A range of plastic materials used in manufacturing, often derived from crude oil.
• Monitorable: Something that needs to be watched or observed closely.