Is There Enough Room For Consumer Goods Makers To Cut Prices?

As consumption slows in India, consumer goods makers could be looking at cutting prices to drive volumes. But that will depend on how much room commodity costs provide.

Indians have cut back spending on biscuits and shampoos to cars amid a stagnant wage growth and falling rural incomes, dragging GDP growth to six-year low. The value growth—a combination of volumes and price-led expansion—of fast-moving consumer goods rose at its slowest pace in seven years in the quarter ended September, according a report by Nielsen India. Second-quarter earnings so far have shown that either volume growth has stagnated or fallen.

Commodity costs fell for makers of soaps and paints, giving them cushion to cut prices. But input costs have risen for biscuit and coconut oil companies. Here’s how raw material prices have played out:

Palm Fatty Acid Distillate

While prices of palm fatty acid distillate, a soap ingredient, have remained volatile for the last 12 months, they are still lower than a year ago. That has provided soap makers to cut prices.

Hindustan Unilever Ltd. lowered prices of mass-market brands Lifebuoy and Lux soaps by 3-4 percent and reduced price of Dove and Pears by 2 percent, the management said in its second-quarter earnings call.

Companies that stand to gain: Hindustan Unilever; Godrej Consumer Products Ltd.; ITC Ltd.

Titanium Dioxide

The price of key input for paints fell 5.4 percent in the last one year.

Asian Paints Ltd., however, didn’t fully pass on lower costs to consumers as it reduced prices by 0.4 percent each in quarters ended June and September. That aided its margin.

India’s largest paintmaker has defied the consumption slowdown as its decorative or household segment volumes grew in double digits. The pace, however, slowed from the preceding three months.

Antique Broking expects the raw material costs to remain benign during the rest of FY20, aiding the company’s margin.

• Companies that stand to gain: Asian Paints; Berger Paints; Nerolac

Wheat And Sugar

Sugar and wheat, the two are key ingredients for biscuit makers, have risen in the last one year.

Britannia Industries Ltd. bought wheat stock worth Rs 700 crore that would cover the company’s requirements till the third quarter. “This is primarily for hedging against increase that we are anticipating will happen in wheat price,” N Venkataraman, chief financial officer, said in the first-quarter earnings call.

Varun Berry, managing director, said since the prices of the commodity have gone up, it proved beneficial for the maker of Good Day biscuits.

But Britannia, newsire PTI reported quoting Vinay Subramanyam, head marketing of at the company, will increase prices in the third quarter ending December to offset higher costs.

• Companies impacted: Britannia Industries; Parle Products; ITC

Copra

Copra prices rose in the last three months but it’s still lower than February peak. Marico Ltd., the maker of Parachute coconut oil, however, hasn’t increased prices and instead offers 20 millilitres free on a 100 ml pack in September.

“Around 40 days in this quarter (ended September) where actually the copra prices went further down,” Saugata Gupta, MD and chief executive officer at Marico, told investors after the second-quarter earnings. The company doesn’t see any significant inflation in the near-term, he said.

• Company impacted: Marico