index, which was up 2.2 per cent on Monday, gained 6.2 per cent in the last one month. While the benefits may not reflect entirely in the October-December quarter, the easing of raw material prices should start making a meaningful impact from the March 2018 quarter onwards.
The US waiver for certain countries, including India on oil imports from Iran, easing supply and concerns over the demand outlook, are supporting the ongoing crude oil price corrections. Though crude oil prices would remain volatile and oil producing and exporting countries’ (Organization of the Petroleum Exporting Countries) meeting - scheduled next month - will weigh on the outlook, experts do not see a sharp rebound in crude oil prices in the near term.
Depending on the inputs, lower raw material inflation would reflect favourably for various FMCG
segments. For paint companies
dependent on crude oil derivatives, lower titanium dioxide and monomers’ cost would help. Similarly, falling prices of vinyl acetate monomer for adhesive makers, too, should reflect positively on margins. These raw materials account for 30-60 per cent of the input costs.
In the September quarter, companies in these segments had reported around 150-500 basis point contraction in gross profit margin on a year-on-year basis, though cost efficiency helped some of them to protect their operating profit margin.
But, with softening crude oil prices, raw material cost of this set of manufacturers should come down and improve their gross profit margin, say analysts. In fact, recent price hikes undertaken by these companies to protect margins would now help it gain further on the profitability front.
Not only raw material, but low crude oil prices are likely to help bring down packaging cost (15 per cent of raw material costs) and logistics costs across the FMCG
space, according to Abneesh Roy, analyst at Edelweiss Securities.
In the case of palm oil, soap and personal products makers are the biggest consumers. Though palm oil prices are down 12.7 per cent in the last one month, companies that use non-edible palm oil i.e., palm fatty acid distillate (PFAD), will benefit significantly. Soapmakers such as Hindustan Unilever
(HUL), Godrej Consumer Products (GCPL) use PFAD, prices of which are down over 24 per cent month-on-month (MoM).
PFAD accounts for about 15 per cent of HUL’s raw material costs and around one-third of GCPL’s.
“Deflation in global palm oil prices is likely to continue benefiting soap players that use PFAD as a key raw material. However, the benefits for food companies would be limited (down around 6 per cent MoM), given the sustained Custom duty rate increase for imported palm oil in the past,” says Nitin Gupta, analyst at SBICAP Securities.
Further, as is the case with paints and adhesives, price hikes would further support the profitability improvement.
Besides the expected improvement in profitability, low input costs would also help to improve volumes and market share, as the companies are now not required to undertake price hikes.
Overall, if things remain supportive as assumed, it should propel earnings. Higher valuations, however, would mean that investors have to be selective while picking stocks in this space.