A new report from Nomura India highlights the significant impact of rising raw material (RM) inflation on the first-quarter (June quarter) margins for Fast-Moving Consumer Goods (FMCG) companies. The brokerage points to inflationary trends in crude oil, crude derivatives, and palm oil, exacerbated by the West Asia conflict, which has particularly driven up packaging material costs.
Mixed Impact Across Consumer Staples
Nomura categorizes FMCG players based on their exposure and resilience to these rising costs:
- Least Impacted: Britannia Industries Ltd, Nestle India Ltd, and Marico Ltd are projected to be the most resilient. Marico benefits from a correction in copra prices, offsetting higher packaging costs. Food companies like Nestle and Britannia are less affected due to stable wheat and sugar prices, alongside softening milk prices, which partly counter increases in palm oil and packaging expenses.
- Moderately Impacted: Hindustan Unilever Ltd (HUL), ITC Ltd, Tata Consumer, and Godrej Consumer Products Ltd (GCPL) are expected to face moderate pressure. HUL, despite price hikes in tea, salt, and detergents, sees margins impacted by crude-based commodities and palm oil. GCPL, with high exposure to crude derivatives, aims to maintain margins. ITC benefits from lower leaf tobacco prices, though recent tax hikes and less proportionate price increases could pressure margins.
- Highest Impacted: Colgate-Palmolive and United Spirits are identified as the most affected. Colgate faces headwinds from inflation in crude-based commodities, higher mentha oil prices, and significant packaging costs. United Spirits grapples with increased glass prices impacting gross margins.
Nomura's Investment Strategy and Outlook
Given the volatile demand and margin environment, Nomura expresses positivity towards select companies within consumer staples that exhibit strong brands, resilient portfolios, pricing power, and robust execution. The firm specifically prefers GCPL and Tata Consumer among these names.
While raw material inflation began in March, Nomura believes Q4 margins were largely shielded by existing inventory. A partial impact is anticipated in Q1, with mid-single-digit to low double-digit cost inflation potentially mitigated by low-to-mid single-digit price hikes without significant volume pressure. However, Q2 is expected to bear the full brunt of this inflation. If cost pressures persist, high-single-digit or double-digit pricing growth may become necessary, which could impact volumes, especially in rural areas, particularly if monsoon forecasts of below-normal rainfall materialize.
Target Prices and Recommendations
Nomura has issued 'Buy' recommendations for seven out of eight stocks under its coverage, with a 'Reduce' rating for Colgate Palmolive. The brokerage's target prices include:
- Hindustan Unilever (HUL): Rs 2,600
- Nestle India: Rs 1,500
- Britannia Industries: Rs 7,275
- Godrej Consumer Products (GCPL): Rs 1,525
- Tata Consumer: Rs 1,450
- Marico: Rs 900
- Dabur: Rs 600
- Colgate-Palmolive (CLGT): Rs 2,050