Consumer Goods: Lower input costs are unlikely to boost consumer goods margins, analysts say


Lower commodity prices may not significantly boost margins for consumer goods manufacturers in the next two quarters as originally expected, as increased advertising spending, consumer offers and rebates to boost demand during the crucial holiday season amid higher freight costs would bite, company executives and analysts said.

Manufacturers of fast-moving consumer goods (FMCG) and white goods said there will be sequential improvement in margins in the second half (October-March) of the fiscal year compared to the first half (April- September), but it is unlikely to reach peak or normal margin levels as originally expected.

“There has been a cooling in some input prices like edible oil, but most others like wheat are still high. While brands struggled with inflation in the first half, they will increase their spending in areas like advertising during the festive season, value and volume promotion, and trade programs, so there won’t be much retention of profitability,” said B Krishna Rao, Chief Operating Officer. senior category at Parle Products, India’s largest biscuit manufacturer.

Rao said there will be a 4-5 percentage point sequential increase in net margin in the second half compared to the first, but it will still be 3-4 percentage points lower than normal. In its latest report, ICICI Securities said there will be an expansion in earnings before interest, taxes, depreciation and amortization (EBITDA) margin for white goods and durable goods manufacturers in the second half due to strong input price correction, but likely below consensus expectations. The report attributes this to higher ad spend, increased transportation costs, R&D investments and new product launches.

ICICI Securities said there was a 6-28% reduction in the prices of major commodities such as aluminum, copper, steel and HDPE in the first half. Pradeep Bakshi, CEO of Tata-owned air conditioner and appliance maker Voltas India, said industry margins will improve sequentially in the second half, but that will depend on increased sales and other factors. .

Industry executives have said consumer goods makers will increase discounts and promotional offers at upcoming holiday sales to revive demand that has slumped in recent months due to record inflation across the board. categories.

Companies are also increasing their spending for the holiday season on advertising and promotion after two moderate pandemic years of 2020 and 2021. In addition, commodity prices have fallen, but are still at a high level for most products by compared to last year.

Marico managing director Saugata Gupta said the impact of commodity inflation is not that big. “Vegetable oil, especially palm oil, an input for many personal products, has fallen, as has edible oil. Crude remains at a high level. So, compared to last year, raw material costs are still higher, but in the third quarter we think they should come down,” he said.

Most companies in their Q1 commentary indicated that operating margins would bottom out in the second half and begin to see sequential improvement starting in the third quarter.

Over the past five years, gross margin for the FMCG industry was at the highest level in fiscal 2020. However, Covid-induced lockdowns, followed by supply chain disruptions, consumer demand moderation and record inflation reduced gross margin by 431 basis points in FY22, according to broker Nirmal Bang.

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