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Sequentially higher commodity costs to impact margins of some companies

We have advanced the release of our commodities note update (usually released at the end of the quarter) with the aim to highlight the sharp price movement seen in key commodities in recent months. This would help identify the 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 1QFY22 earnings and beyond – as the topline could face some headwinds from the ongoing lockdowns implemented by various state governments in light of the rising COVID cases. The commodity cost impact would be fairly sharp in certain cases.

Commodity costs seeing high inflation

* Brief takeaways on demand situation from results declared thus far:

Among the results declared thus far, most of the companies have delivered sales growth in line with or below our expectations. While companies indicated momentum buildup toward the end of 4QFY21, the lockdowns imposed by state governments have somewhat impacted this momentum. Manufacturing and supply chain operations have not been affected, as they were last year, with companies better prepared to manage the ongoing second wave. With the high commodity inflation seen in 4QFY21, most companies have seen compression in gross margins YoY. While near-term demand is difficult to predict, companies seemed confident about the medium- to long-term outlook – with price increases and cost savings likely to support operating margins.

* Crude prices rebound:

Crude prices continued to edge up to 8% QoQ in QTD May’21. The increase is even sharper vis-à-vis last year, with prices being 109% higher YoY on the low base of 1QFY21 (lows of USD17.3/barrel in Apr’20). Prices were up 5.7% MoM at USD68.4/barrel (monthly average for May’21).

* Agri commodities basket sees high inflation in pockets over last year, though prices moderately higher sequentially in 1QFY22 (QTD May’21):

Barley and palm oil saw the sharpest sequential cost increase, with most of the other agri commodities reporting only a marginal increase. Barley costs were up 24.3% YoY and 24.4% QoQ on a QTD basis. Wheat costs were down 1.7% YoY, but 1.3% higher QoQ. Mentha prices declined 10.5% YoY and came in flat QoQ. SMP prices were up 8.1% YoY and 2.6% QoQ. The sugar index was flat YoY, but up 4.9% QoQ. India’s molasses WPI was largely flat YoY (+1%), but 8% higher sequentially (as of 4QFY21). Palm oil cost remained high at 89.6% YoY and 10.2% QoQ. While there was sharp cost inflation in copra in 4QFY21 (31.2% YoY and 12.7% QoQ in 4QFY21), MRCO management indicated that the good seasonal arrival of copra has resulted in a 13–15% reduction in Apr’21 from 4QFY21 peak prices.

* Non-agri commodities basket continues to see sharp inflation (QTD May’21):

VAM costs surged 186% YoY and 19.1% QoQ. Palm fatty acid distillate (PFAD) prices were up 82.5% YoY and 8.9% QoQ. Gold prices (MCX Gold) rose 8.8% YoY, but were flat QoQ. Titanium dioxide (TiO2) costs were also higher at 12.6% YoY and 4.4% QoQ.

* Entire commodities cost basket sees some inflation (QTD May’21) on YoY/QoQ/MoM basis to 36.2%/9.1%/3.9%:

While moderate inflation was seen in the agri basket – largely led by higher palm oil prices (up 22.5%/7.5%/3.2% on a YoY/QoQ/MoM basis) – it is expected to benefit staple companies with strong pricing power; there is no cause for concern as of now. On the other hand, the non-agri commodities basket saw sharp inflation on a YoY/QoQ/MoM basis to 59.6%/12.6%/5.1%. We believe this would not only affect the margins of discretionary players but also impact demand – as the price increases needed to pass on RM cost inflation would be steep. We continue to closely watch out for any signs of spiraling inflation in the agri basket.

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