Falling input costs may cool prices of essentials, apparels
Prices of groceries, daily essentials and apparel are likely to fall over the next two quarters as input costs are expected to decline, spurring sales in the process, according to consumer goods makers.
Fast-moving consumer goods (FMCG) firms such as Hindustan Unilever, Britannia, ITC, Marico and Emami have indicated in their recent earnings calls that input cost pressure is set to ease in the next two quarters. The companies said they will pass on the input cost benefits by reducing prices, increasing pack weights or running consumer offers.
Commodity prices have fallen considerably in the past few weeks.
Cotton prices have declined 30% in the past four to six weeks, easing pressure on apparel makers, while in the last fortnight cooking oil wholesale prices have declined 12% for rice bran oil, 5% for sunflower oil and 7% for groundnut oil.
Brent oil prices touched a fresh 10-month low last week which augurs well for FMCG companies as many raw materials are linked to the commodity.
Vegetable prices have also cooled down with seasonal vegetables coming into the market. In some cases, like onion, prices have plunged more than 50% since Diwali. Wholesale onion prices crashed to Rs 13-14 per kg on Monday at the benchmark Lasalgaon market in Maharashtra, from Rs 30 per kg in the first week of November, aided by good supplies from Madhya Pradesh and Karnataka.
Emami vice chairman Mohan Goenka said the drop in input prices will lead to a 150 basis points expansion in gross margins sequentially in the next two quarters. “Consumers can expect promotional offers in large packs in the next two quarters aided by the drop in input cost, but for sachets it is difficult since we did not tamper (with) prices or volumes even during the peak of inflation,” he said.
A basis point is a hundredth of a percentage point.
ITC Ltd executive director B Sumant said wheat prices are likely to decline in the next quarter when the harvest happens, as the area under cultivation has been good. “There has been some reduction in sugar prices. Edible oil prices have moderated. So, with some hope of moderation in inflation as well as enhanced farmer realisation, consumption is likely to pick up in the second half,” he said.
The drop in input costs as well as commodity prices is cyclical as it is linked to an improvement in agricultural production. This time, it is aided by a recessionary trend in the West which is hurting demand for many products.
Surging inflation resulted in an adverse impact on demand for consumer products in the past four to six quarters, as a large section of consumers with lower disposable incomes, especially in semi-urban and rural markets, cut down or deferred consumption.
For instance, Britannia managing director Varun Berry told analysts earlier this month that there has been 32% inflation in the past seven quarters and the company increased prices 20.5%. Most FMCG companies have increased prices 20-30%.
Value fashion retailer VMart Retail managing director Lalit Agarwal recently told analysts that cotton prices fell 30% in the past 1.5 months, though they were still above the pre-Covid levels. He said while the company has already cut prices of the current autumn-winter line, the next spring-summer season will see further reduction of apparel prices.
In the past two months, companies slashed prices or increased grammage for soaps, edible oil and large packs of packaged food to pass on the benefit to consumers from a drop in prices of palm oil, edible oil and crude oil.
BV Mehta, executive director of edible oil industry body Solvent Extractors’ Association, said while the international prices of cooking oils are stable, there is some downward pressure on domestic cooking oil prices amid expectations of robust production of soybean, groundnut and cotton seeds, and the ongoing sowing of mustard is also expected to be good.
Electronics prices are expected to remain stable and companies have indicated they will not shy away from price cuts to pass on the benefits in case input costs decline further if the exchange rate remains favourable.
“Commodity prices have cooled down, but the rupee has depreciated to 82 against the dollar, nulling the impact since the earlier benchmark was Rs 78. Otherwise, we could have dropped prices,” said Godrej Appliances business head Kamal Nandi.
India’s wholesale and retail inflation fell in October after remaining high for several months – while retail inflation, measured through Consumer Price Index, fell to a three-month low of 6.7%, Wholesale Price Index was at a 19-month low of 8.39%.
S&P Global ratings on Monday cut India’s economic growth forecast for current fiscal to 7% from 7.3% earlier but said the domestic demand-led economy will be less impacted by the global slowdown.