More pain ahead for FMCG stocks as input costs bite

Rising input costs triggered by soaring crude oil prices have dented sentiment of fast moving consumer goods (FMCG) stocks over the past few weeks.
 
Considered a defensive bet in a turbulent market, investors dumped these counters even as the overall market sentiment remained choppy.
This was due to surging crude oil prices, which triggered an upward march in prices of most raw materials used by FMCG companies, which could chip away their margins.
 
Over the last quarter, prices of commodities like palm oil, crude oil and SMP (skimmed milk powder) are up 23 – 42%.

At the bourses, the S&P BSE FMCG index has lost nearly 5 per cent as compared to over 3 per cent fall in the S&P BSE Sensex.
If analysts are to be believed, there could be more pain ahead for these stocks as crude prices continue to rise amid the geopolitical tensions between Russia and Ukraine.

After a four-and-half month freeze, the government bit the bullet and has started to hike prices of petrol and diesel gradually, which analysts say could fuel inflation and force consumers to cut back on their purchases.

Besides, the upward revision of fuel prices would also translate into higher freight costs and keep rural demand under pressure.
On their part, FMCG companies plan to hike product prices yet again to cope with the rising raw materials cost.

But, industry incumbents and dealer/distributors have highlighted that Q4 saw further moderation in rural demand due to price hikes. Urban markets, too, witnessed some demand slowdown.
 
"Rise in key input costs is a concern, especially for staple, paint & QSR firms; we expect product price hikes despite which, margins are at risk,” says Jefferies. 

Instead of a recovery in gross margins in fiscal 2022-23 (FY23), Jefferies now builds-in 50-200 basis point (bps) YoY decline, assuming crude prices stay closer to $100 a barrel and palm oil at $1,500 per metric tonne in FY23.

At the fundamental level GCPL, HUL, ITC, Colgate, Devyani International and Zomato are Jefferies’s top picks in the FMCG space.
Mumbai-based Antique Stock broking is bullish on HUL, Dabur and ITC.

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