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Another round of price hike starts in consumer sector

Thursday, 27 March 2014 - 11:37pm IST | Place: Mumbai | Agency: dna

For consumers, there seems to be no respite from rising prices despite this being an election season.

Thanks to higher input costs and increased operational expenses, prices of automobiles and several other consumer products such as soaps, detergents and hair oil have begun inching up though sales are falling due to slowdown.

Car companies including Hyundai Motor, Honda Cars, Mahindra & Mahindra (M&M) and Renault India are raising prices from April 1, while others are contemplating such a move.

Sources said the increase, second this year, could be in the range of 2-3%.

Nikunj Sanghi, dealer of M&M and Hero MotoCorp, said, "There will be a major impact on demand if the prices increase by 2-3% because the excise benefits passed on to the consumers last month will be wiped off."

Last month most automakers had announced a 4-6% reduction in prices after the government cut excise duty on cars and utility vehicles to stimulate demand.

Rakesh Srivastava, senior vice-president, Hyundai Motor India, said, "Higher input costs due to high exchange rates, increase in freight charges on account of high fuel prices and unplanned expenditure due to excise cuts, which has led to compensation for channel inventory, have put an increasing pressure on margins."

A few car companies have announced aggressive discounts and schemes in March to push inventories as it is the last month of the fiscal.

"We saw demand returning this month due to higher discounts and price cuts. Withdrawal of schemes in April and increase in prices will be dampener for the industry because the market sentiment continues to remain down," said Sanghi.

Surjit Singh Arora, analyst with brokerage Prabhudas Lilladher, said, "Historically April is when prices of automobiles go up. The quantum of hike will decide the exact impact on demand. If the rise is around 1%, then it is unlikely to have any negative impact."

According to industry sources, two-wheelers makers may too raise prices; however there has been no indication from the companies.

It's not just automobiles, but a whole host of other consumer goods such as soaps, detergents and hair oil may see price increases on account of rising input costs.

Prices of several key raw materials such as copra, palm oil and other crude-linked packaging materials have gone up in the last three months. For instance, HDPE, a packaging material has gone up 23% year on year, while prices of LAB, a crude linked raw material used in soaps, are up 12%.

On a month-on-month basis, palm oil price is up over 11% since the two months, while copra is up 12.3%.

Industry experts said the companies will not be left with any other option but to go in for a fresh round of price hikes.

Amnish Aggarwal and Gaurav Jogani of Prabhudas Lilladher said these price hikes will prove to be a double whammy for the companies that are already reeling under slowing volume growth.

"We note that volume growth in consumers has seen a steady decline over the past few quarters on high inflation and poor consumer sentiment. We believe that further price increases will delay the volume growth recovery."

Analysts said this will have an impact on the margin growth too, which has so far been a silver lining for the FMCG pack.

"Raw material prices have inched up but companies can't pass the cost on to the consumer in the same quantum as demand environment has been weak. As a result, margins will also get affected," said another analyst with an international brokerage firm.

In order to ensure that the buying power of the consumer is not affected severely, companies will try and ensure that the price hike is limited to mid single-digits in percentage terms, said Abneesh Roy of Edelweiss Securities.

On the other hand, promotions and discounts have become more selective and are present only in highly competitive sectors such as detergents or oral care. With rising input costs, companies may get even more selective with the promotions, said experts.

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