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Consumer product companies are likely to benefit in the fourth quarter of the 2012-13 financial year from softening commodity prices. Demand for these inputs remain tepid in a weak economic environment.
In recent months, palm fatty acid distillate (PFAD), used in making soap, is down by 25 per cent over the year-ago period. Liquid paraffin, used in manufacture of hair oil, is down 10 per cent. Mentha oil and peppermint oil, used in making toothpaste, are down 25-30 per cent over the year-ago period.
Hence, makers of these products would find their manufacturing costs lower in comparison to the year-ago period, translating into higher gross margins. Analysts estimate that gross margins of companies in the three months ended March 2013 will improve by at least 100 basis points over the year-ago period, thanks to commodity prices coming off their peaks in this time frame.
The other fallout is price cuts that companies will initiate. Hindustan Unilever Ltd (HUL), for instance, cut soap prices by 12-20 per cent in the past one month, thanks to lower PFAD prices. Nitin Mathur, consumer research analyst at brokerage Espirito Santo Securities, says by cutting prices, companies hope to prop volumes at a time when it has been weak.
HUL's volume growth in the last three quarters, for instance, has steadily come down from nine to 10 per cent in the June 2012 quarter to seven per cent in the three months ended September 2012 to five per cent in the three months ended December 2012.
The scenario has been no different for Marico, the maker of Saffola and Parachute oils, with volume growth for the two brands coming down from levels of 12-18 per cent in the June 2012 quarter to four to six per cent in the three months ended December 2012. Ghaziabad-based Dabur saw its volume growth come down to nine per cent in the December 2012 quarter from 10-11 per cent in previous quarters.
"While HUL will benefit from softening input prices, competitive activity will continue to be high," says Amar Ambani, head of research at Mumbai-based brokerage India Infoline.
Marico, Dabur, Colgate and Godrej Consumer are also likely to benefit from lower input costs.
Competitive pressures, say analysts, will keep advertising and sales promotion (ASP) expenditure high. From 11-12 per cent some quarters earlier, ASP expenditure has increased to 13-14 per cent. This expenditure, says V Srinivasan, analyst for fast-moving consumer goods at Mumbai-based Angel Broking, will continue to hover at these levels in the fourth quarter.
CONSUMER BENEFIT
* Key inputs such as palm fatty acid distillate are down 25 per cent. Liquid paraffin is down 10 per cent, peppermint oil and mentha oil are down 25-30 per cent in the last three months
* The fallout of this is that companies will see gross margins improve in the fourth quarter of the 2012-13 financial year
* HUL and Marico have already begun cutting prices of soaps (in the case of HUL), hair oils and edible oils
* Some of the other beneficiaries of lower input prices will be GCPL and Dabur
