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MOSL: CONSUMER-Commodity costs largely benign; Savior in subdued demand environment

CONSUMER: Commodity costs largely benign; Savior in subdued demand environment

 

In this edition of our consumer sector update, we take a look at the movement in key commodity prices and identify companies under our coverage that could benefit from it. The analysis of the price trends becomes even more relevant from the 1QFY20 earnings perspective, as top-line growth for the sector is expected to be subdued due to various issues. 

 

Commodity costs for consumer companies largely benign

• At a time when sales growth for consumer companies is expected to be subdued due to the uncertain demand environment, channel liquidity issues, etc., we believe that lower input costs can act as a savior, providing enough room for companies to spend on promotions/offers and advertisements to drive category volumes. A sharp movement will also impact margins, but we believe that the same might reflect in the gross margins of consumer companies with a lag of a quarter or two, depending on inventory levels and forward covers.
• After hitting lows in Jan'19, crude prices have again started moving upward - up 8.4% sequentially but still down 8.1% on a YoY basis.
• Agri commodity basket: Majority of the agri commodities are witnessing deflation sequentially, except sugar (sugar index up 2.8% QoQ/10.5% YoY). Wheat costs are up moderately by 7% YoY but down 4.9% QoQ. Barley costs were up 24% YoY for the quarter. On the other hand, palm oil costs were down 16.8% YoY. Mentha prices were up 14 YoY but down 11.7% sequentially. Copra prices are down sharply by 23.9% YoY/11.6% QoQ (YTD May 2019). 
• Non-agri commodity basket: PFAD prices declined by 16% YoY/6.2% QoQ. VAM costs declined sharply by 26.5% YoY/5.6% QoQ. Tio2 costs were up 6.5% YoY but were flat sequentially. HDPE costs declined around 20% YoY YTD until May, while LLP costs were flattish YoY.