Companies across sectors – including consumer goods, cement, paints and consumer goods – are seeing pressures on margins as raw material costs increase. While Q2 gross margin levels (and EBITDA in some cases) have been hit by higher input prices, most businesses are now hinting at higher prices after Diwali.
Consumer goods companies have experienced unprecedented inflation in many key raw materials.
Sanjeev Mehta, CMD, HUL – the country’s largest consumer goods company – during an earnings call said that prices of many commodities are still at multi-year highs. Although tea prices are down against record levels of 2020, prices are still high compared to 2019 levels. Moreover, global supply chains are experiencing massive disruption, with a shortage of shipping containers, high freight rates, congestion at ports and the recent energy crisis in China. .
According to analysts, edible oil prices are up 35-50 percent year on year, while prices for crude derivatives, a key material for paint companies, have jumped 30 percent year on year.
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“We’ve never, I think in the past three or four decades, seen very strong inflation. And overall inflation is closer to about 18-20 percent when we see from the third quarter,” Amit Singel, CEO and managing director of Asian Paints, said during the earnings call. from last year.”
UltraTech – India’s largest cement manufacturer – spoke on its quarterly earnings call about the coal shortage. Fuel prices have seen an unprecedented rise of $50 in less than a month (as on Oct 18th) on top of winter stock building requirements in West and North Asia. In India, “all coal supply has been diverted to thermal power plants”. Hence a return to petroleum coke – whose prices have risen twice – “makes economic sense,” the company’s management said.
HUL saw gross margins in Q2 FY22 fall by more than 150 basis points year over year – indicative of raw material pressure – to 50.8 percent (52.3 percent) while EBITDA margins fell 40 basis points. On an annual basis to 25 per cent. The company’s management said it remained “cautiously optimistic about the upcoming quarters” but reiterated that “gross margins are likely to remain under pressure”. The company hinted at “prudent pricing measures coupled with cost agility and savings programmers.”
Nestlé, one of India’s largest food companies, saw a 240 basis points drop in gross margins year on year. Margins were 55.7 percent at the end of the September quarter (compared to 58.1 percent in the same period last year) and EBITDA margins fell 90 basis points year-on-year to 24.5 percent. The company said prices for nine out of 13 key raw materials are “close to or at maximum 10-year levels” while high inflation continues across the board. Inflationary pressures are expected in the coming quarters as well.
Marico, the maker of Parachute coconut oil, saw its gross profit margin drop by more than 560 basis points to 42.5 percent (48 percent since last year) mainly due to an increase in edible oil prices. The company expects gross profit margins to improve sequentially in the third and fourth quarters. It expects an improvement in operating margins only in the fourth quarter, given that advertising spending will rise from the third quarter and a large portion of the benefits of the second round of cost-effectiveness will begin to accrue in the fourth quarter.
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Asian Paints — the nation’s largest paint maker — reported a gross margin of 12.7 percent, the lowest in several quarters in the second quarter of fiscal 22, and down from 16.4 percent in the previous three months. In an analyst call, the company’s management said its goal is to maintain operating margin in the 18-20 percent range through a combination of cost savings and “calibrated product price increases to offset higher input cost.” As of September 30, the company raised prices by 7 percent against inflation of 21 percent.
Analysts who track sectors say price hikes are inevitable if companies are to maintain profit margins.
For example, paint companies have already warned their channels of an 8-12 percent price hike in November onwards. channels business line I spoke to that Asian Paints & Berger Paints — two of the biggest paints in the sector — called for increases of 9 and 8 percent, respectively, the largest and highest rises ever this fiscal year. There have been two to three price hikes in paint prices this fiscal year.
Asian Paints management said on its earnings call: “We have taken a series of price increases and will consider another increase in prices to mitigate the impact of this persistently high inflation. We are confident that we should be able to turn that around in the next quarter.”
Berger has not announced second-quarter results yet.
UltraTech Cement CEO and CFO Atul Daga said during its earnings call that the company began raising prices in late October. But this is “not enough”. Prices are up 3-7 percent or $10-15 per bag on average depending on the regions in India.
“Sometime during October we increased prices in almost all areas and now prices are back to what they were before the monsoon. This is certainly not enough to cover cost pressures, he said, adding that “…there is a general expectation among infrastructure players,” he said. In the merchant community that price hikes are imminent. So, there is very little resistance.”
Dagga said the cement industry would require a price increase of at least 10 percent to return to margin levels in the first quarter of FY22.
Price point goes up
According to Nielsen, demand for fast-moving consumer goods moderated in August and September.
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Commenting on the price hike, HUL’s Mehta said, “Price increases occur in two ways. One is when you take the MRP up, and the other is when you reduce the amount of products in a package. When it comes to price point packages, a price increase occurs when you reduce the amount of product in a package with point protection. Price While protecting the price point, due to lower quantity, this has the effect of lower volume growth, although the number of units may remain the same.”
“For us, keeping consumer privilege intact and protecting the business model when the environment is volatile is critical,” he added.