Increased pressure on household budgets due to rising inflation amid the Ukraine crisis is already impacting demand, they said.
“There is limited scope to fully pass on the raw material inflation, considering the steep price hikes already taken,” ICICI Securities wrote in a report on Thursday. “Hence, we revise our revenue, margins and earnings estimates.”
It said price hikes will particularly hit discretionary items.
Prices of key raw materials including crude and agri-commodities have increased sharply in the past three weeks since Russia’s invasion of Ukraine, adding to already steep inflationary trends.
Crude oil prices have surged 30% quarter on quarter in the ongoing quarter, while prices of ingredients and packaging materials such as wheat, corn, aluminium and high-density polyethylene (HDPE) have increased between 9% and 48% year on year.
“The situation is extremely volatile due to the ongoing geopolitical environment, and the pressure on margins remains,” said Ankush Jain, chief financial officer at packaged consumer goods company Dabur, which makes Vatika shampoo and Real juice.
Rising costs have forced several household products makers including Hindustan Unilever, Nestle, Amul and Mother Dairy to undertake a fresh round of price hikes of between 3-16% for milk, coffee, noodles and tea over the last fortnight even as consumers are downtrading, or buying lower-priced packs, to mitigate the impact of spiralling household budgets.
“The inflationary pressures and resultant price increases have led to consumers tightening their purse-strings and relooking at discretionary purchases while also downtrading to smaller packs,” Jain of Dabur said. “Inflation remains unabated and is a cause of concern for the second year in a row.”
India’s retail inflation rate measured by the Consumer Price Index (CPI) increased to 6.07% in February, hitting an eight-month high.
Jefferies India in a report said inflation and sluggish rural demand may deter the Indian consumer goods industry.
Analysts said they have downgraded earnings estimates for listed consumer companies by anywhere between 7-16% for FY23.
“We expect most companies to see sequential contraction in gross margins,” Motilal Oswal said in a report. “In the case of soaps, detergents, paints, and adhesives, where companies have already taken sharp price hikes, they may be wary of further increases to avoid denting demand.”
The brokerage said elevated commodity prices will stay for longer than expected as a direct consequence of the Russia-Ukraine situation.
Crude oil prices have increased on fears of a global supply crunch and sanctions on Russia, a major oil-producing nation. Also, Russia and Ukraine are major exporters of food grains and edible oils.
Profitability of alcobev companies too will come under pressure, with sharp increase in barley costs, a key raw material for beer, apart from spiralling packaging and glass costs, industry officials said.
“The current geopolitical tension leads to more volatility,” United Breweries managing director Rishi Pardal said.
He said the company is seeking to mitigate the impact of increased commodity costs over the next few quarters through a combination of productivity, cost control, and judicious price increases for which it is in conversation with state governments.
Since alcobev prices are controlled by states, price revisions cannot be undertaken independently by companies.
“Since United Breweries purchases its barley requirement for the entire year in February and March, its FY23 margins may come under pressure,” Motilal Oswal said in its report.
Price of palm oil, a key raw material for nearly all staples companies and soap manufacturers, increased 12.1% month on month in February. The situation further worsened by the recent restrictions on palm oil exports by the Indonesian government. This has impacted companies such as Godrej Consumer Products and HUL. Soaps account for one-third of the former’s domestic sales, while in the case of HUL, 70% of sales accrue from personal care and home care segments where again several products rely on palm oil.
For Britannia, too, higher prices for edible oil, wheat and sugar are likely to put pressure on margin as biscuits account for more than 80% of its sales.
In its recent post earnings analyst call, the Nestle management said prices of nine out of 13 key commodities are close to their decade highs.
Consumer electronics companies, too, have taken price hikes in the range of 15-17% to offset higher prices of key raw materials such as aluminium and copper that have surged 9% to 48% year on year during the ongoing quarter.
FMCG volume sales had dipped 2.6% year on year in the quarter ended December due to inflationary pressures and price hikes taken by companies, market research firm NielsenIQ said in its quarterly FMCG update.