After nearly two years of consistent inflation, margins for FMCG companies such as Hindustan Unilever, Godrej Consumer Products, and Tata Consumer Products will expand due to a sharp correction in edible oil prices. As the cost of palm oil hits a six-month low in June 2022, experts predict that Indian edible oil players will consequently start reducing their prices soon. However, experts suggest that it is unlikely that premium FMCG companies reverse the price hikes taken during this time to bolster margins.
Facing record-high inflation for the past few quarters, premium FMCG players have consistently increased the prices of goods to correct margins. According to the June FMCG Pulse Update, every kilogram of packaged consumer goods sold at present are around 10 per cent costlier year on year due to the sharp increase in raw materials.
For the past eight to ten quarters, companies such as Hindustan Unilever, GCPL, Britannia, Nestle etc have been consistently flagging that the rising commodity prices have put persistent pressure on their margins. Companies like HUL noted in their Q4 filings that due to commodity price pressures, sale volumes for the company had stagnated due to the price hikes taken by the company.
At present, the price of palm oil has sharply declined, clocking prices at around $1200 per metric tonne compared to the peak prices of $1800-1900 per metric tonne seen earlier. This will result in a significant decrease in the raw material costs of these players. Palm oil is an integral raw material in various packaged products, from chips and noodles to beauty, health and hygiene goods, and can be found in 40-50 per cent of products in a company’s portfolio.
At the present top, FMCG brands appear reluctant to bring down prices, and analysts predict that it is unlikely they will be bringing prices down anytime soon. On the flip side, analysts such as Edelweiss note that should the trends of price reduction persist in crude and palm oils, FMCG companies can see gains in margins from the second half of FY23. “The recent sharp correction in palm oil bodes well for many FMCG players, especially HUL, Britannia, GCPL and Nestle. Despite the slowdown in rural demand due to inflation, we exect robust rural growth in the medium to long term,” said the Edelweiss report.
“The leaders’ strong fundamentals remain intact, irrespective of inflation. In our view, it would infact shift to organised and larger players as smaller players see more impact,” said the Edelweiss report.