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Sequentially higher commodity costs likely to impact margins of a few companies

We have advanced the release of our commodities note update, which we usually release at the end of the quarter, as we believe it is important to highlight the sharp price movements of key commodities in recent months. This would help to identify companies under our coverage that could benefit from or be negatively impacted by the changes. It is relevant to analyze price trends from the perspective of 4QFY21 earnings and beyond as topline for a majority of the sector is expected to deliver strong growth on the back of a low base in the previous year, lower COVID cases, upbeat consumer sentiment, strong rural demand, record high Rabi sowing, and a recovery in celebratory occasions. The commodity cost impact would be quite sharp in certain cases.

Commodity cost increased for some Consumer companies

* Most Consumer companies are expected to either return to or exceed preCOVID sales levels and deliver EBITDA growth in 4QFY21, due to 1) a lower base in the previous year, 2) increased mobility on the back of lower COVID cases, 3) strong rural demand, 4) record high Rabi sowing, 5) recovery in celebratory occasions, and 6) improved consumer sentiment. Rural markets will lead growth on account of a good harvest, higher government spends, lower COVID impact, and a better Agri outlook, with normal monsoons expected. Recovery in urban markets continues to be strong as life in the metros and larger cities moves back to normal with increased mobility. While e-commerce has shown its prominence over last year and general trade returns to pre-COVID levels, modern trade is normalizing now after facing headwinds caused by the pandemic in the past few quarters. Price hikes taken by most companies earlier in the year as well as during the quarter, combined with continued stringent cost-control measures, should offer some relief from the sequential inflationary trends seen in most commodities. Most companies in the sector have resumed ad spends and brand investments, but are expected to continue curtailing discretionary spends as part of their efforts on cost savings.

* Crude prices rebound: Crude prices have seen a sharp rise, with a 17.2% YoY /32.9% QoQ increase until Feb’21. Prices were up 13.6% MoM at USD62/barrel (monthly average for Feb’21).

* Agri commodity basket seeing moderate deflation over the last year though prices are higher sequentially in 4QFY21 (until Feb’21): Barley cost fell 28.4% YoY, but are up 4.6% QoQ. Wheat costs are down 16.3% YoY, but are 6.5% higher QoQ. Mentha prices declined 16.8% YoY, but were up 1.5% QoQ. SMP prices were down 6.8% YoY but flat QoQ. The sugar index was down 2.2% YoY/1.2% QoQ. India’s molasses WPI declined 4.9% YoY, but was 0.7% higher sequentially (until Jan’21). Copra cost was up 29.5% YoY/11.2% QoQ. Palm oil cost remains at higher levels, rising 44.2% YoY and 14.2% QoQ.

* Non-Agri commodity basket seeing sharp inflation (until Feb’21): VAM costs rose sharply (70.9% YoY and 25.3% QoQ). Palm Fatty Acid Distillate (PFAD) prices were up 39.6% YoY/14.8% QoQ. HDPE/LLP costs increased 24.6%/26.8% YoY. Gold prices (MCX Gold) rose 17.4% YoY, but declined 4.2% QoQ. Titanium dioxide (TiO2) costs were higher at 8.9% YoY/3.2% QoQ.

* On an average, the entire commodity cost basket witnessed some inflation (until Feb’21) on a YoY/QoQ/MoM basis, up 12.8%/9%/1.5%.

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