Falling crude oil price brings good tidings for India's FMCG sector

For FMCG companies, a fall in input prices will mean that they can pass on some of the gains to consumers at a time when market sentiment has been weak
Fast-moving consumer goods (FMCG) companies stand to gain from the slide in crude prices, since many use oil and its derivatives in their products. Brent crude touched $34 a barrel on Monday, a fall of nearly 24 per cent over the previous day’s close. On Tuesday, the commodity recovered some ground, hovering at $37 a barrel.

The forecast is that oil prices will remain depressed owing to coronavirus concerns as well as the price war that has begun between oil producers — Russia and Saudi Arabia.

For FMCG companies, a fall in input prices will mean that they can pass on some of the gains to consumers at a time when market sentiment has been weak. In the October-December 2019 period, FMCG growth was at a six-quarter low, according to market researcher Nielsen, and is expected to remain muted for the three months ended March 31, 2020.

 
Lower input costs will also help companies on the margin front, Kaustubh Pawaskar, associate vice-president, research at brokerage Sharekhan, said since the exposure of players to crude-linked derivatives is high.

Almost 50 per cent of an FMCG company’s raw material basket is crude-linked depending on the category and product type, analysts tracking the sector said. A fall in the price of crude affects derivatives such as linear alkyl benzene (LAB), light liquid paraffin (LLP), titanium dioxide and high-density polyethylene (HDPE).

 

 
LAB is used in making detergents and constitutes nearly 50 per cent of the latter’s total input cost. LLP is used in hair oils, creams and cosmetics, constituting 30 per cent of their total raw material cost. Titanium dioxide is a key input in paints, constituting 40 per cent of its total input cost. While HDPE is used in packaging material for all staples from soaps to detergents, hair oils, creams, shampoos and toothpastes. It constitutes 15-20 per cent of total input cost of these products.

A spokesperson for Hindustan Unilever (HUL), the largest soaps and detergents maker in India, said the company had no comments to offer on the matter. However, analysts expect the price of consumer staples to fall in the next two months. Vivek Gambhir, managing director and chief executive officer, 

Godrej Consumer, the country’s second-largest soaps maker, said a price drop in soaps depended on the movement of palm oil derivatives, a key input going into the product. “Palm oil derivatives may or may not follow the trend of crude oil price declines,” he said. “If the price of palm oil derivatives falls significantly, then we will pass on the benefits to consumers over the next few months,” he added.

HM Bharuka, managing director of Kansai Nerolac Paints, said the company had not taken any decision on price cuts owing to the volatility in crude, currency as well as supply disruption of pigments and specialty chemicals from China. Pigments and specialty chemicals are some of the other inputs going into paints besides titanium dioxide.

“Had the crude correction not happened on Monday, then we would have taken a price hike in industrial paints owing to the supply disruption of pigments and specialty chemicals from China. In decorative paints, we will have to wait and see how volatile crude is and whether it stabilises at a certain level,” he said.

But competitors such as Asian Paints, said sector analysts, had cut decorative paint prices by 1.1 per cent over the past nine months of FY20 owing to benign crude prices. The company could initiate further pricing action in the next few months owing to the oil price crash, sector experts said. Officials at Asian Paints, however, were not immediately available for comment.


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