Reduced pressure from crude, rupee prompts FMCG firms to defer price hikes

Ease in inflation amid drop in oil prices has prompted firms to defer price increases

The drop in crude oil prices by 30 per cent in the last month and a half has brought relief to fast-moving consumer goods (FMCG) companies battling inflationary pressures. The rupee-dollar exchange rate, too, has fallen in the wake of a drop in crude oil prices, prompting companies to postpone price hikes they earlier planned to take up.

In July-August, most FMCG players had taken 2-3 per cent price hikes in select categories, with a second round across a broader swathe of products slated for now. “That has been deferred,” Sunil Duggal, chief executive officer of Dabur India, said when contacted. 

“The inflation outlook, for now, is stable and this is good news, given the volatility in crude and currency was high,” he said.

In October, crude had touched $86.09 to a barrel, while the rupee was hovering at levels of about 73-74 a dollar.

Back in July, the country's largest FMCG company Hindustan Unilever (HUL) had called out crude and currency volatility as key risks for the sector, stating they were important monitorable for the future. 

While the point was reiterated last month during an announcement of the second quarter results, HUL's Chairman and Managing Director Sanjiv Mehta said the firm would be cautious when taking price hikes. 

“We will consider all factors before taking price hikes. That strategy will remain even during inflationary times,” Mehta had said in response to a specific question on the issue.

However, analysts now say that HUL and its peers can afford a pause when it comes to price hikes because the pressure from both crude and currency has significantly reduced. The rupee now stands at 70.70 a dollar, coming off levels of 74.39 seen last month. “Companies can now focus their attention on pushing volume growth, since price hikes will not happen immediately,” said Kaustubh Pawaskar, senior research analyst, Sharekhan. 

“However, if crude prices inch up again, priorities will have to be reset,” he added.

Typically, FMCG firms are affected significantly when there is volatility in crude. Derivatives linked to crude such as linear alkyl benzene (LAB) and high-density polyethylene (HDPE) act as crucial inputs for these companies.

An increase in price of these inputs will lead to an increase in production costs, thus putting pressure on companies to raise prices, says G Chokkalingam, founder of Equinomics Research & Advisory. “In the event, they do not raise prices, they could suffer an impact on their margins, especially operating margins,” says Chokkalingam. 

LAB, for instance, is used in making detergents and constitutes almost 60-70 per cent of its input cost. 

HDPE is used in packaging material for essential consumer items such as soaps and detergents, hair oil, creams, shampoos, and toothpastes. Packaging costs of these products constitute 15-20 per cent of the overall production cost for FMCG companies.