New Delhi: Inflationary headwinds will hurt near-term profitability of large fast-moving consumer goods companies and impact volume growth in the first half of the next fiscal, analysts at Kotak Institutional Equities said in a report on Friday.
“The sharp rise in commodity prices led by the Russia-Ukraine conflict would weigh on profitability of most consumer companies in the near term. Further, it would impact consumption that was already showing signs of weakness especially rural demand," they said in a note.
The brokerage revised growth estimates for consumer companies under its coverage, keeping in mind inflation in crude and palm derivatives as well as edible oils and a 5-15% inflation in select agri commodities.
“We now expect flat-to-modest volume growth in 1HFY23E for most FMCG companies versus mid-single digit volume growth expectations earlier. A quick resolution of geopolitical issues and good monsoon pose upside risks to our estimates and vice versa," the analysts added.
Companies could cut advertising and promotion spends to partially offset raw material headwinds, they said.
“Incremental price increases to pass on inflation would impact volumes, companies may absorb a part of inflation in select categories to gain share from unorganized players, companies would leverage portfolio diversity and strengths," analysts at the brokerage added.
Companies have been facing inflationary headwinds for a few quarters now, driven by the supply glut caused by the pandemic. Most companies took price hikes over the last few quarters to mitigate high inflation. However, the conflict in Ukraine has further exacerbated cost pressures.
A spike in raw material costs would merit several companies to initiate incremental price increase of 4-12%; this is in addition to a similar price increase taken in 2021, according to the report.
Among companies that could witness greater impact of higher input costs are those in the home and personal care segment that the brokerage said would be the “worst hit".
Select foods and beverages and quick service restaurant companies are better placed, they added.
“The magnitude of demand destruction due to inflation would vary across categories. Within our coverage universe, Godrej Consumer Products, Hindustan Unilever Ltd., and paints companies are most impacted, while Dabur, Marico, Nestle, Britannia and ITC will be moderately impacted," the said.
Rise in prices of glass bottles and cans as well as wheat and barley would impact profitability of alcoholic beverages companies.
The extent of impact on liquor makers would depend on the quantum and timing of price increases which rests on hinges on state approvals. Titan Company does not face any direct risk but volatility in gold prices can defer demand in the short term, they added.
