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Inflationary pressure on agri commodities

We analyze price movements in key commodities and identify companies under our coverage that could either benefit from these changes or face adverse effects.

Agri commodity prices exhibiting inflationary trend

* Most agricultural commodities have experienced a rise in prices YoY, which is expected to impact FMCG companies such as Dabur, HUL, Nestle, Britannia, Marico, and Tata Consumer. Wheat prices have increased 11% YoY and 8% QoQ. Barley prices have surged 15% YoY and 7% QoQ, which is expected to affect companies such as United Breweries and Nestle India. Sugar prices have increased 4% YoY but remained flattish QoQ, while coffee prices have surged 14% YoY and 6% QoQ, potentially impacting companies such as Nestle and HUL. Copra prices have increased 8% YoY and 5% QoQ. Palm oil prices have increased 5% YoY while stabilizing on a sequential basis.

* Further, the government has recently increased import duty on edible oil to support domestic producers. The import duty on crude palm oil, soybean oil, and sunflower oil has been raised from 0% to 20%, while the tariff on the refined varieties of these oils has surged from 12.5% to 32.5%.

* In response to the rising costs of raw materials, companies are planning to implement price hikes in 2HFY25. FMCG companies may also consider adopting new cost-saving initiatives, optimizing supply chains, and exploring product mix adjustments to mitigate the effects of the rising input prices.

Non-agri commodity prices cooling off

* Crude oil prices are experiencing a decline, primarily due to the economic slowdown in China, and are currently trading at around USD75/barrel. The average crude price has decreased 7% YoY and 5% QoQ, which is expected to benefit paint companies significantly.

* Additionally, the prices of other commodities such as TiO2, TiO2 China are experiencing a downward trend. VAM China prices have declined 19% YoY and 4% QoQ, which will benefit companies such as Pidilite (PIDI).

* Gold prices have risen 21% YoY, while remaining stable QoQ. Although gold prices initially decreased by approximately 8-10% following the cut in customs duty, they have surged again due to an increase in global prices.

Impact of commodity prices on companies

* APNT and PIDI: With crude oil and its derivatives following a deflationary trend, paint and adhesive companies stand to benefit. This trend will be favorable for both APNT and PIDI. The lower input costs are likely to benefit their profitability, enhancing their cost structures moving forward.

* BRIT: Commodity inflation remains a challenge for BRIT as key raw materials have witnessed significant price increase; for instance, wheat price is up 11% YoY, while the prices of sugar and milk have risen 4% YoY. The company is likely to initiate price hikes to manage the rising input costs, ensuring sustained margin levels.

* DABUR: A notable increase in maize prices, up 22% YoY and 15% QoQ, adds pressure to DABUR’s cost base. However, with mentha prices declining 4% YoY and stabilizing sequentially, the company may selectively raise prices to protect margins.

* GCPL: GCPL’s commodity basket presents a mixed outlook. While crude oil and soda ash prices have declined, Malaysian palm oil and palm fatty acid prices have shown inflationary pressure, potentially impacting overall cost management.

* HUVR: HUVR is witnessing a mixed pricing environment. The declining crude oil and soda ash prices provide some relief, but inflationary trends in maize, tea, coffee, Malaysian palm oil, and palm fatty acids are likely to challenge margin stability.

* HMN: HMN remains conservative on pricing, planning only minimal hikes of 1- 2% in FY25. Mentha prices have seen a 4% YoY decline while stabilizing sequentially, providing HMN with relief on costs.

* Nestle: A sharp inflation in Nestle’s commodity basket, attributed to an increase in wheat, sugar, cocoa beans, coffee, and milk prices, is likely to pressure margins. The company is expected to implement a price hike as a response to the input cost inflation.

* UBBL: Barley and glass bottles (packaging costs) are the key RMs for UBBL. Barley has experienced a price rise again, up 15% YoY and 7% QoQ, following a sharp decline in FY24. Packaging costs, particularly for glass bottles, remained stable for six quarters, providing some respite.

* UNSP: For UNSP, molasses prices are up 6% YoY but have stabilized QoQ. Glass packaging prices remained steady, which will enable the company to efficiently manage costs in the near term.

Our View We anticipate improved volume growth in FY25, driven by enhanced demand sentiment, a favorable monsoon, and increased government budget allocation for the rural economy. We reiterate our overweight stance on the staple sector and continue to favor HUL, GCPL, Dabur, and Emami as our top picks.

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