Sector Update | 6 April 2020
Brent Crude Index
Commodity costs largely benign; packaging costs to drop
Savior in subdued demand environment
In this edition of our consumer sector update, we analyze price movement in key
commodities and identify companies under our coverage that could benefit from or be
negatively impacted by it. It is relevant to analyze price trends from the perspective of
4QFY20 earnings and beyond as topline growth in the sector is expected to be subdued
due to various factors, while the commodity cost impact being quite sharp in some cases.
Commodity costs remain largely benign for consumer companies
Mentha Oil prices INR/kg
Palm Fatty Acid price (INR/MT)
Consumer companies are expected to witness subdued sales growth due to an
uncertain demand environment, disruption in the supply chain on account of
COVID-19-related lockdown, channel liquidity issues, and rural slowdown,
among other factors. However, we believe lower input costs would offer some
relief to companies, providing room for spending on promotions/price-offs and
other offers to drive up category volumes once the lockdown impact ends. But,
rising competitive intensity would also mean low material cost’s benefits would
be nowhere near as high as they would in a more favorable operating
environment. Moreover, most companies in the sector have curtailed ad spend
/ new launches due to persistently weak demand. Therefore, promotion
intensity is expected to be high and affect realization and sales growth in the
Crude prices plummet:
After trending up on a QoQ basis in 3QFY20, crude
prices began their downtrend 4QFY20 onwards – down 18.5% sequentially (up
1.1% in 3QFY20), down 19.3% YoY, and down 39.1% MoM at USD33.5 per barrel
levels (monthly average for March). A similar level was witnessed in Feb’16,
when crude prices came in at USD33 per barrel (previously observed in Mar’04).
Agri commodity basket sees moderate inflation/deflation in 3QFY20:
index fell 2.4% QoQ / 2.6% YoY. On the other hand, wheat cost rose 7.5% YoY /
fell 3.1% QoQ, against fears of a further sequential increase. Barley cost
continued at high levels (up 10.8% YoY / 0.2% QoQ). Similarly, palm oil costs
were up 33.4% YoY / 7.5% QoQ. Mentha prices declined 21.8% YoY and 3.4%
QoQ. Copra costs came in flat YoY, but were up 6.5% QoQ (YTD Feb’20).
Non-agri commodity basket, barring gold and PFAD, sees deflation:
declined 18.2% YoY / 0.8% QoQ. Tio2 costs were down 9.5% YoY / 3.5%
sequentially. Up to Feb’20, HDPE costs declined ~15.2% YoY YTD, and LLP costs
were down 2.1% YoY YTD. Gold prices (MCX Gold) expanded 26.1% YoY and
7.3% sequentially. PFAD prices were up 49.5% YoY / 26.8% QoQ.
On an MoM basis, the entire commodity cost basket declined 4.4% on
average, v/s rising 1.2% QoQ and 2.7% YoY.
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Research Analyst: Pooja Doshi
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.