Barring Crompton Greaves, all other FMEG companies reported a margin decline of 2–5 percent in H2FY21 owing to a surge in prices of commodities such as copper, plastics, steel and aluminum. These commodities are a key raw material for the FMEG or White Goods sector.
In the first half of fiscal 2021, almost all commodities were at multi-year high levels—copper, steel, aluminum, and polyprop were up 44 percent, 38 percent, 22 percent, and 29 percent, respectively. The price rise took a toll on companies’ gross margins in the third and fourth quarter of fiscal 2021.
The White Goods space—ACs, Refrigerators, Washing Machines may see a moderation in demand on account of continued price inflation, said experts.
“The primary reasons for this are the large ticket sizes of the product categories vis-à-vis other product categories and the availability of substitutes. Price increases of 5–10 percent taken by companies across most categories have somewhat cushioned gross margins,” Motilal Oswal said in a report.
Although commodity costs weighed on gross margins, the EBITDA margins of most companies expanded– led by sustained cost rationalization in employee expenses and reduced discretionary spends in other expenses, particularly ad spends, the report added.
The EBITDA margins of most companies therefore expanded by 0.5–4.5 percent in 3QFY21 and 4QFY21, while margins moderately declined for Polycab.
Experts also believe while part of the cost reduction is attributable to higher efficiency and cost engineering, some of the other expenses may be incurred once the COVID situation normalises. Hence, until commodity prices moderate or demand picks up substantially, analysts expect cost cuts to continue.
The White Goods space is highly competitive and various cash-rich MNC players are present in the market, which frequently opt for market share gains over margins for 2–3 year durations.
“Such competition limits price hikes even by leading companies. A case in point is Voltas’ management commentary that the second tranche of a 3 percent price increase was taken only in certain geographies owing to higher competitive pressure. Thus, in the event of input price pressure, the White Goods space could witness margin pressure,” the brokerage report said.
Motilal Oswal prefers companies in the Electrical space over Durables in the current commodity price inflationary environment. Orient and Crompton are its top picks in the sector.
Havells could also be a beneficiary in current times—as it is a premiumisation story and hence not as susceptible to commodity price inflation. Moreover, it has cost levers, such as ad spends, which could cushion margins, it said.
(Edited by : Ajay Vaishnav)