NEW DELHI: A spike in prices of key commodities could erode consumer companies‘ pricing power and dent corporate profits over the next few months as firms will likely absorb most of the increase in input costs, experts said.
Crude oil prices rose sharply to $85.3 per barrel in the July-September period from $76.6 per barrel in the previous quarter, according to data released by the World Bank. Groundnut oil was up 6% sequentially during the same period, whereas soybean oil was up 11% from the previous quarter. Rice prices were higher by almost $100 to around $600 per metric tonne.
“Rise in commodity prices (energy) is already being seen (to an extent) in the sequential uptick in corresponding categories in WPI (wholesale price index),” said Rahul Bajoria, managing director and head of EM Asia (ex-China) economics at Barclays.
He pointed out that the Reserve Bank of India’s surveys suggest firms expect an easing in the growth of selling prices in the next few quarters across manufacturing and services.
“So, some moderation in the pricing power of firms is likely,” Bajoria said. “Pass through to retail prices…will be gradual, if at all, and dependent on how much the current rise in commodity prices sustains.”
Surveys released by S&P Global Market Intelligence indicated that private sector activity took a hit in October due to rising costs, while business sentiment dipped due to rising inflation expectations. While surveys indicate that companies are able to pass on costs for now, economists posit that a passthrough may not be possible across commodities, as pent-up demand is fading and companies have little room to manoeuvre.
“PMI (Purchasing Managers’ Index) shows the input costs are slowly rising. If oil remains high, there is going to be margin pressure,” said Abheek Barua, chief economist at HDFC Bank. “In this kind of situation, if consumption demand were to weaken a little, then the ability to pass on prices would be compromised. And consequently, you might see some profit pressures coming on consumer-facing companies,” he added.
Oil prices for the Indian crude basket rose to $90.2 per barrel in October from the $82.3 average in the first half of FY24. Consumer companies have already sounded a note of caution about the impact of uneven monsoons on crop output and volatility in global prices of commodities such as crude.
Nestle India in a post-earnings management commentary last week said uneven rains and monsoon deficit in some parts of the country could impact production of maize, sugar, oilseeds and spices, which could have an adverse impact on its pricing.
Coffee prices, too, have remained volatile because of a global supply deficit, said the Indian arm of the world’s largest packaged foods company and maker of Nescafe coffee and Maggi instant noodles. Coffee prices (Robusta) were up 16% year-on-year in the July-September quarter.
Hindustan Unilever Ltd (HUL) said in a management commentary that it sees price growth marginally in negative territory, given the prevailing commodity prices. “There are parts of the portfolio where we have increased prices. For instance, coffee and dairy prices have gone up, so we too hiked prices in coffee and health food drinks (HFD) portfolio,” Ritesh Tiwari, chief financial officer of HUL, said.
Consumer companies’ profit growth was higher during the first half of FY24. But experts indicate that profit growth may moderate as cost pressures build up. “The profit growth of listed companies has been strong in H1FY24, supported by a reduction in input cost pressures,” said Gaura Sengupta, economist at IDFC First Bank, adding that this had helped them counter a slowdown in sales growth.