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CONSUMER: Input cost environment turning favorable; Provides support to margins in near term

Consumer: Input cost environment turning favorable; Provides support to margins in the near-term; aids promotions and volume growth

 

Crude showing respite

• The ongoing crude price correction, if sustained, should bring relief to a few consumer companies from point of view of margins. We believe the same would reflect in gross margins of consumer companies with a lag of a quarter or two, depending on the inventory and forward covers.
• Also, correction in crude and crude derivatives should be positive for FMCG companies across the board given the implications it has on packaging and logistic costs, but the extent would be difficult to determine.
• Ad spends’ intensity based on savings from crude related costs over this period does not seem to vary significantly. This is true for APNT, PIDI and for the rest of the consumer pack. However, consumer companies, particularly APNT and PIDI appear to pass on the benefits, either through realization reduction or through promotions during certain short periods of the deflationary phase. This is particularly true of APNT over a more sustained period, extending from 1QFY16-2QFY17. Paints are an oligopoly, unlike adhesives and thus APNT, unlike PIDI feels the need to pass on the benefits more.
• For 3QFY19, the average input prices for consumer companies has remained mostly inflationary YoY led by crude-linked inputs, but pressures have reduced as the average prices are currently down 10% QoQ and off 38% from its peak at the end of the December quarter. Most key crude-linked inputs such as Titanium Dioxide (TiO2 - up 14.4% YoY), Vinyl Acetate Monomer (VAM - up 6.3% YoY), Linear Alkyl Benzene (LAB - up 16.1% YoY) and High-density Polyethylene (HDPE - up 27% YoY) have corrected from their peaks, except Light Liquid Paraffin (LLP – up 21.5% YoY), which is still showing an upward trend.