Inflation has been a challenge for packaged consumer goods makers since the onset of the COVID-19 pandemic. The rupee’s fall against the dollar is set to worsen their struggle.
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Packaged consumer goods makers have been locked in a seemingly never-ending battle with inflation since the onset of the COVID-19 pandemic in 2020.
The fall in the rupee against the dollar is set to increase the input costs and inflate the import bills of the so-called fast moving consumer goods, or FMCG, companies, analysts say.
In 2022, the rupee has fallen around 10 percent against the dollar. The Indian currency opened higher at 82.63 against the dollar on Wednesday, November 2, after closing at 82.70 against the currency the previous day.
“Recently the prices of key raw materials like palm and crude are seeing some downward trend from their peak, with a slight volatility, but the fall in the rupee is a cause of concern in the short term as it has fallen 2-3 percent in the last two months,” said Preeyam Tolia, senior research analyst at Axis Securities.
According to Pushan Sharma, director-research at CRISIL Market Intelligence and Analytics, the rupee is expected to average around 79.0 in the year to March 2023, compared with 76.2 in March 2022.
“Rupee depreciation coupled with crude price rise is expected to increase input costs,” Sharma said.
Supply-chain challenges, container shortages and adverse climate changes in major edible oil-producing countries raised raw material prices initially. Geo-political tensions climaxing with Russia’s invasion of Ukraine kept them elevated.
Of late, the price of palm oil, a major ingredient in FMCG products, from soaps and skin care products to packaged foods, has been stable. But the falling rupee has again raised concerns about the input costs of FMCG companies, which could pressure their profit margins.
Margin concerns
The constant rise in input prices has impacted the margins of FMCG companies for several quarters now. Most companies operating in the segment experienced shrinking margins in the quarter ended September.
Hindustan Unilever’s gross margin in Q2 dipped 588 basis points year-on-year (YoY) to 44.9 percent and its Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) margin dipped 176 basis points YoY to 23.3 percent. One basis point is one-hundredth of a percentage point.
Similarly, Dabur India’s consolidated gross margin contracted 350 basis points YoY to 45.4 percent. Colgate-Palmolive reported a gross margin contraction of 310 basis points YoY to 63.8 percent, its lowest in 20 quarters. Nestle India, too, registered a gross margin contraction of 300 basis points YoY to 52.5 percent in Q2.
The fall in the rupee value can further dent the margins of these companies, especially given the already tepid demand in rural areas.
“Volume demand has been tepid in the FMCG industry for a few quarters largely due to muted rural demand. We expect CPI (consumer price index) inflation to average 6.8 percent in fiscal 2023 compared with 5.5 percent last fiscal, with the rise being broad-based across food, fuel and core inflation. Amid muted volume demand, players will only be able to partially pass on the rise in costs, exerting downward pressure on margins in the near term,” said Sharma of CRISIL Market Intelligence and Analytics.
Tolia of Axis Securities, however, expects margins to improve sequentially in the third quarter and any impact to be short-term.
“We remain cautiously optimistic in the second half of FY23 and expect gross margin improvement on a sequential basis as most of the high-cost inventory has already been absorbed by most of the FMCG companies in the first half of the financial year,” he added.
In the near term, the securities firm said, it has concerns about HUL and Asian Paints, as palm and crude derivatives account for 20-30 percent of their total raw material costs.
FMCG companies flag rupee fall
Companies such as Hindustan Unilever, the maker of Lux, Lifebuoy, Dove and Surf Excel brands, and Tata Consumer Products (TCPL), which manufactures products such as Tata tea and Tata salt, recently raised concerns about the rupee’s depreciation.
Addressing investors after reporting the company’s second quarter (Q2) earnings, HUL’s Chief Executive Officer and Managing Director Sanjiv Mehta said while commodities such as palm oil have stabilised of late, the prices of most other commodities remain elevated.
Read: Inflation remains a challenge for FMCG industry: HUL management
“The other source of inflation has been the currency. Globally, high levels of inflation have triggered aggressive monetary tightening measures from central banks across the world. This has led to a strengthening of the US dollar. USD-INR rate which was around 74 at the beginning of this fiscal, has crossed the 80-rupee mark, hovering around 82, halfway through the year,” said Mehta.
HUL’s net material inflation (NMI) in the June quarter was 20 percent; it climbed to 22 percent in the September quarter. Mehta indicated that its NMI in the December quarter is expected to be a bit lower than in the September quarter.
