More pain awaits consumer goods stocks as input costs hurt them

Higher input costs caused by higher crude oil prices have dampened the sentiment in Fast Moving Consumer Goods (FMCG) stocks over the past few weeks. Seen as a defensive bet in a turbulent market, investors have dumped these counters even as overall market sentiment remains volatile. This was due to higher crude oil prices, driving up prices for most of the raw materials used by consumer goods companies, which could reduce their profit margins. During the last quarter, the prices of commodities such as palm oil, crude oil and SMP (skimmed milk powder) increased by 23 – 42%. in the stock exchanges S&P BSE FMCG Index It lost nearly 5 percent compared to more than 3 percent of the decline in S&P BSE Sensex. If analysts are to be believed, there could be more pain ahead for these stocks as crude oil prices continue to rise amid geopolitical tensions between Russia and Ukraine. After a four-and-a-half-month freeze, the government has hit the bullet and is starting to gradually raise gasoline and diesel prices, which analysts say could fuel inflation and force consumers to cut back on purchases. Besides, upward revision of fuel prices will also translate into higher freight costs and keep rural demand under pressure. For their part, FMCG companies are planning to raise product prices again to keep pace with the rising cost of raw materials. However, industry incumbents and dealers/distributors highlighted that the fourth quarter saw further moderation in rural demand due to higher prices.

Urban markets have also seen some slowdown in demand. “Rising costs of key inputs is a concern, particularly for basic materials and coatings companies and rapid quality standards; we expect product prices to rise though, margins are at risk,” Jeffries says. Instead of recovering in gross margins in FY 2022-2023 (FY23), Jefferies is now accumulating a 50-200 basis points (bps) annual decline, assuming crude oil prices stay near $100 per barrel and palm oil at $1,500 per metric ton. In fiscal year 23. On a basic level, GCPL, HUL, ITC, Colgate, Devyani International, and Zomato are Jefferies’ top picks in consumer goods. The Mumbai-based Antique Stock brokerage is bullish on HUL, Dabur and ITC.

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