India Inc faces pressure on margins as costs contract

Companies across all segments – including FMCG, cement, paints and consumer durables – are witnessing pressure on margins with rising raw material costs. While the levels of second quarter gross margins (and EBITDA in some cases) were affected due to rising input prices, most companies are now hinting at higher prices after Diwali.

Consumer goods companies have experienced unprecedented inflation in several key commodities.

Pressure on costs

Sanjiv Mehta, CMD, HUL – the country’s largest mass-market player – during a call for results, said prices for many commodities continued to hit multi-year highs. Although tea prices have fallen from record highs in 2020, prices remain high from 2019 levels. In addition, global supply chains are experiencing massive disruption, with shortages of shipping containers, skyrocketing shipping rates, port congestion and the recent energy crisis in China.

According to analysts, the prices of edible oils rose 35 to 50 percent year-on-year, while those of crude derivatives, a key material for paint companies, jumped 30 percent year-on-year.

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Amit Syngle, CEO and Managing Director of Asian Paints, said during the earnings call: “We have never seen, I think in the last 3-4 decades, inflation this high. And headline inflation is closer to around 18-20% when we see a third quarter of last year. “

UltraTech – India’s largest cement maker – in its quarterly earnings call, spoke of coal shortages. Fuel prices have seen an unprecedented jump of $ 50 in less than a month (as of Oct. 18) added to the stocking needs of West and North Asia for winters. In India, “all coal supplies were diverted to thermal power plants”. Therefore, the return to petcoke – whose prices are multiplied by 2 – “makes economic sense,” said company management.

Pressure on margins

HUL recorded a decline in its gross margins in T2FY22 of more than 150 basis points year-on-year, indicating pressure on raw materials, to 50.8 percent (52.3 percent), while margins d ‘EBITDA fell 40 basis points year-on-year to 25 percent. Company management said it remained “cautiously optimistic about the quarters ahead”, but reiterated that “gross margins should remain under pressure”. The company hinted at “smart pricing actions coupled with cost agility and cost savings programmers.”

Another of India’s biggest food companies, Nestle, posted a 240 basis point drop in its gross margins year-on-year. Margins stood at 55.7% at the end of the September quarter (up from 58.1% in the prior year period) and EBITDA margins fell 90 basis points year-on-year to 24 , 5%. The company said the price of nine of the 13 major commodities is “near or at 10-year highs” as high inflation persists across the board. Inflationary pressures are also expected in the coming quarters.

Marico, maker of Parachute coconut oil, saw its gross margin drop by more than 560 basis points to 42.5% (48% a year ago), mainly due to higher prices from edible oil. The company expects gross margins to improve sequentially in the third and fourth quarters. He expects an improvement in operating margins only to occur in the fourth quarter, as ad spend will increase from the third quarter and much of the benefits of a second round of Cost rationalization measures will begin to manifest in the fourth quarter.

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Asian Paints – the country’s largest paint maker – reported a gross margin of 12.7%, a multi-quarter low in T2FY22, and down from 16.4% in the previous three months. In a conference call with analysts, company management said their goal is to keep the operating margin in the 18-20% range through a combination of cost savings and ” product price increases calibrated to offset rising input costs “. Until September 30, the company took a 7 percent price hike against material inflation of 21 percent.

Price increases

Industry analysts say price hikes are inevitable if companies are to maintain margins.

For example, paint companies have already alerted their chains to an 8-12% price hike from November. Canals Activity area Asian Paints & Berger Paints – two of the largest in the industry – have asked for increases of 9% and 8%, respectively, their biggest and highest on record in this fiscal year. There have already been two or three price hikes for paint this fiscal year.

Asian Paints management, in its earnings call, said, “We have taken a series of price increases and would consider a further price increase to mitigate the impact of this still high inflation. We are convinced that we should be able to turn the tide in the next quarter. “

Berger has yet to announce its second quarter results.

UltraTech Cement chief executive and chief financial officer Atul Daga said in his earnings call that the company had launched price hikes until October. But these “are not enough”. Prices have increased by 3-7% or 10-15 yen per bag on average depending on the region of India.

“During the month of October we increased prices in almost all areas, prices are now back to what they were before the monsoon. This is certainly not enough to cover the cost pressures, ”he said, adding that“… there is a general expectation among infrastructure players in the dealer community that price increases are imminent. So there is very little resistance.

The cement industry, Daga said, would need a price hike of at least 10% to return to FY22 first quarter margin levels.

The price goes up

According to Nielsen, demand for consumer goods moderated in August and September.

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Mehta of HUL, while commenting on the price increases, said, “The price increase is happening in two ways. One is when you take the MRP, the other when you reduce the amount of product in a pack. When it comes to price packs, the price increase occurs when you reduce the amount of product in a pack while protecting the price. While you are protecting the price, due to the reduction in quantity, it impacts your volume growth even though the number of units may remain the same.

“So for us it’s very critical to keep the mainstream franchise intact and to protect the business model when the environment is volatile,” he added.

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