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    Commodity upcycle: Opportunity amidst adversity for consumer companies

    Commodity upcycle: Opportunity amidst adversity for consumer companies

    Commodity upcycle: Opportunity amidst adversity for consumer companies
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    By CNBCTV18.com Contributor  IST (Published)

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    Even food companies are facing pressure from a spike in vegetable oil and sugar prices though the inflation in Agri commodities is not as significant at this stage.

    The commodity prices have been on a boil in the recent past. As a result, input costs have increased sharply for consumer companies. It has put the margins of the consumer companies under pressure. This is mainly on account of inflation in crude derivatives and palm oil. Even food companies are facing pressure from a spike in vegetable oil and sugar prices though the inflation in agri commodities is not as significant at this stage.
    Boiling Prices of Key Ingredients
    Spot prices in crude derivatives, palm oil, aluminium, and copper are over 40 percent higher than the FY21 average prices. Spike in crude derivatives like vinyl acetate monomer (VAM) is as high as 90 percent. And crude palm oil is up by 55 percent during the same period.
    As a result, all the major consumer companies are forced to take a hit on their margins. Hike in crude derivative prices has hurt companies like Asian Paints, Pidilite, Colgate, and Dabur. Crude derivatives are used as major key ingredients by these companies. Their EBITDA Margin erosion could be in the range of 100-350 bps in the near term under its impact.
    Similarly, a spike in prices of palm oil directly impacts the margins of HUL, Godrej Consumers, considering its extended use in soaps, and beauty and skincare products. Even food companies like Britannia and Nestle are facing pressure. This is due to the spike in vegetable oil and sugar prices. And inflated prices of copra directly impact the hair oil portfolio of Marico.
    Even consumer electronic companies are marred by the spike in the cost of aluminium and copper. This could see margin erosion in the range of 200-250 bps.
    Better Placed Over Unorganized Counterparts
    Despite the extremely volatile commodity prices, most of the FMCG companies are in a better position to protect their margins. These companies have a better reach and they cater to a larger market with high volumes. It provides them ample pricing power over their unorganized competitors.
    Smaller players tend to have lower capital and work with a very limited raw material inventory. They also tend to work with lower gross margins. Thus, they need to immediately pass on pricing to avoid losses in the events such as a sharp increase in commodity cost.
    Larger players, on the other hand, have the ability to handle much larger inventory. It gives them bargaining power over the suppliers. They have also responded to rising commodity prices by cutting down on discretionary ad spends. Hence, they are in a better position to maintain their end prices for a longer duration.
    Opportunity in Adversity
    A combination of these factors allows larger players to gain market share from smaller players. Local brands could drop their prices once commodity inflation cools off. Yet, the market share gain made during this period is expected to sustain, as consumers having upgraded themselves to a better product or a more aspirational brand are unlikely to downgrade.
    A similar trend had played out in FY21 as Tata Consumers delivered much stronger volume growth in tea despite taking very large price increases. Similarly, Marico’s edible oil brand Saffola has seen high volume growth in FY21. This is despite taking large price increases. The brand has managed to keep its newly acquired market share since then.
    The author, Vaibhav Agrawal, is CIO at Teji Mandi Investment Advisor. The views expressed are personal
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