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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 analyze the movement in key commodity prices and identify companies under our coverage that could benefit from it. Analysis of the price trends is even more relevant from the perspective of 2QFY20 earnings, as topline growth of the sector is expected to be subdued due to various issues.

 Commodity costs for consumer companies largely benign

• Sales growth of consumer companies is currently expected to be subdued due to the uncertain demand environment, channel liquidity issues, flood impact, etc. However, we believe that lower input costs offer some relief to companies, providing room to spend on promotions/price-offs and other offers to drive category volumes. Most companies in the sector have curtailed adspends/new launches due to the persistently weak demand. Therefore, promotion intensity is expected to be high and affect sales growth in the quarter. A sharp movement up could also impact margins, but we believe that the same might reflect in gross margins of consumer companies with a lag of a quarter or two, depending on inventory levels and forward covers.
• Crude prices trending south: After trending up in 1QFY20 on QoQ basis, crude prices have again started descending - down 9.7% sequentially (up 8.4% in 1QFY20) and down 17.8% YoY (down 8.1% in 1QFY20).