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| Edited By: Shailaja Sharma |Source: DNA |Updated: Mar 18, 2018, 04:38 AM IST
Input costs for Hindustan Unilever, Godrej Consumer Products, Colgate Palmolive and Dabur are likely to inch up further with rupee hitting another low last week. Consumer goods companies will have to pay more for imported commodities like palm oil, packaging and crude-linked raw materials LAB (linear alkyl benzene) and LLP (light liquid paraffin) that have a global impact on pricing.
Indian importers will complain that currency fluctuations continue to erode benefits of price correction in commodities likes palm oil. Last Thursday, the rupee fell to a low of 54.3 to the US dollar, only to recover 1.6% to 52.8 on Friday.
Palm oil is a key raw material in manufacture of soaps while LAB and LLP are used to make detergents, personal care products and cosmetics. Hindustan Unilever, India’s largest fast moving consumer goods (FMCG) company, and its rival Godrej, could suffer most in this context.
“Rupee depreciation largely impacts our soaps business because of palm oil that we import. In the last few months, the rupee has depreciated almost 20%, which, in turn, increases our input costs by 20%. This is adding to the margin pressure,” said P Ganesh, chief financial officer, Godrej Consumer Products.
Colgate and Dabur are likely to feel the heat as well as they depend heavily on crude-linked raw materials. About 40% of Dabur’s raw material requirement is likely to be impacted by currency fluctuations. As for Colgate, almost 70% of its raw material requirement could be impacted.
Woes for FMCG firms began with a series of input price hikes in the first half of this fiscal. But because they were calibrated, their impact was not severe: they were just a part of the collective rise in input costs which have since savaged the FMCG sector. The rupee started depreciating since August, affecting the forward raw material covers of consumer companies.
Gautam Duggad, research analyst, Prabhudas Lilladher, said some companies may be more impacted than others, depending on their current raw material cover. “Those dependent on palm oil and other imported commodities will be impacted the most,” he said.
On the other hand, Nestle, Marico, ITC and GlaxoSmithKline Consumer are likely to be among the firms least impacted by the trend, analysts said. These firms source most of their raw materials locally. But for Nestle, there could still be some cause for concern as packaging material, coffee and vegetable oils are globally-linked commodities.
If currency depreciation holds at current levels, the affected companies will have to absorb further input price hikes, wrote MF Global Sify Securities’s analysts Naveen Kulkarni and Ennette Fernandes in their recent report. The duo estimated the impact of raw material costs based on the US dollar at Rs52.
To safeguard margins, FMCG companies will have to either hike product prices by 4-8% or reduce advertisement spends and save costs by other initiatives, or do both.
Ganesh of Godrej Consumer Products said further price hikes will become eminent, but will again be calibrated. Although volume growth for the sector remains strong, holding on to both the volume growth and consumers will be the trickiest task for companies.
“Recent correction in the global commodity prices would have been good news for commodity importers like India. But, at the same time, a sharp 20 percent depreciation of rupee has prevented any meaningful benefit so far,” said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance, in a statement last week.
