HUL, Dabur, Britannia: Consumer Firm CEOs Say More Price Hikes In Q4

The chief executives of India's top consumer goods makers have said the price hikes across products are likely to offset inflationary pressure on margins. That also runs the risk of hurting already-depressed demand.

While the makers of soaps to biscuits are making money, volume growth has been dismal because of a rural slowdown. And they face an unrelenting pressure on margin as higher retail prices haven't kept pace with the surge in input costs.

Addressing analysts and investors after the third-quarter results, the chief executives of Hindustan Unilever Ltd., Marico Ltd., Dabur India Ltd., Emami Ltd. and Britannia Industries Ltd. indicated that they braved exceptional price instability in most of their raw materials, packaging and transportation costs, with some hitting even 20-40 year highs between October and December last year.

Inflation, they said, is expected to rise more in the March quarter before starting to normalise from FY23 onwards.

“We continue to witness a 2-3% rise in commodity prices,” said Varun Berry, managing director of Britannia Industries. The biscuit maker will effect a 10% hike during the January-March period, even though “at least 12% was required to cover inflation”. It may have to take more price hikes in the first quarter of FY23 to offset inflationary pressures on margin, Berry said over the call.

Sanjiv Mehta, chairman and managing director at HUL, expects inflation to moderate in the second half of 2022. “Commodity inflation continues to be a significant headwind… In fact, the operating conditions remain challenging in the near term, as we are seeing sequentially more inflation so far in the March quarter as compared to the December quarter,” he said.

HUL, too, hinted at price hikes across products in the quarters ahead.

According to Dabur India CEO Mohit Malhotra, the Chyawanprash maker is seeing a 4-5% inflation over and above the high base of last year. “We don’t see any abatement of inflation in the next two quarters,” he said. “More price hikes are likely to maintain margins.”

ITC Ltd.’s cost of raw materials shot up 20.3% year-on-year and 4.89% sequentially in the third quarter, according to data filed with the exchanges.

Margins Hit

With price hikes not enough to keep up with rising costs, pressure on margins is obvious.

According to Mohan Goenka, director at Emami, two key raw materials have really disturbed its margins. “One is liquid paraffin or LLP, which has gone up by about 30-35%, and the second is rice bran oil, which has also gone up significantly over the last 8-9 months,” he told analysts.

“Gross margin was adversely impacted in spite of price increases totaling to 7% taken during the year,” said Jaideep Nandi, managing director at Bajaj Consumer Care. “LLP and refined mustard oil prices for the quarter were 27% and 54% higher, respectively, over the same quarter of FY21. Even sequentially, these two key inputs saw inflation of 6-11%,” he told investors.

However, the prices of a few raw materials, such as tea and palm oil, have come off their peaks, aiding firms like HUL and Tata Consumer Products.

Analysts see the current inflationary woes as near-term concerns with margins reviving in FY23.

“Major raw materials have been inflationary for more than two quarters, but it is improbable that the inflationary impetus would persist beyond FY22, as the global supply system would have geared up by then to meet the rising demand,” Abneesh Roy, executive vice president, institutional equities, at Edelweiss Securities wrote in a note on the consumer goods sector.

Generally, he said, price hikes happen with a lag due to time taken to implement it and pass them through to distributors. In Q3, the companies have seen their margins bleed as the hikes were not enough to protect the margins. But Q4 is likely to be better as the full impact of the hikes flow in.

Dwindling Demand

Indian consumers have started opting for lower-priced packs or unbranded food products, soaps, edible oil and home cleaning items due to broad-based inflation, according to research firm Kantar, which tracks household consumption trends across urban and rural India.

This further gives credence to the volume growth figures of consumer goods companies in the third quarter of FY22. Only Britannia emerged as an outlier, delivering volume growth of 5% year-on-year.

With such high levels of inflation squeezing household budgets, HUL’s Mehta said that volumes have fallen and this decline is more pronounced in the rural market.

Data by NielsenIQ, sourced from the industry, shows volume growth in the October-December quarter contracted by 1.8%, while value growth stood at 9.9%, compared to the year-ago period.

“With the kind of inflation we are seeing, we really do not know when it (demand) would improve,” said Goenka.

Rural India accounts for 36% of a typical consumer company's sales, and is a critical focus area due to its substantially lower per capita consumption, in areas that make up nearly two–thirds of the country’s population, said Roy. A prolonged rural slowdown is a key risk.

Cost-Cutting Cushions Margins

Most companies have cut advertising spends in Q3 to save costs in continuation of the trend seen over the past five quarters . “Till there is some level of normalcy in terms of raw material costs, lower levels of ad spends by companies would continue,” Roy said.

“Marico’s higher ad spends shows high competitive intensity from Dabur and Adani Wilmar Ltd.,” said Roy.