Sector Update | 8 July 2020
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Benign commodity cost trend continues
In this edition of our Consumer sector update, we analyze price movement in key
commodities and identify the 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
1QFY21 earnings and beyond as topline growth in the sector is expected to be subdued due
to various factors, while the commodity cost impact would be quite sharp in certain cases.
Brent Crude Index
Commodity costs remain largely benign for consumer companies
Mentha Oil prices INR/kg
Palm Fatty Acid price (INR/MT)
Most consumer companies are expected to witness decline in sales growth in
1QFY21, weighed by disruptions witnessed in manufacturing and the supply
chain on account of the COVID-19-led lockdown. Channel liquidity issues and
urban slowdown, particularly in the discretionary categories, were other factors
that led to sales decline. However, we believe lower input cost would offer
some relief. Most companies in the sector have curtailed ad spend / new
launches due to persisting weak demand. Both these factors are likely to check
what would otherwise have been a much sharper EBITDA margin decline given
the plunge in sales YoY, significant downtrading, and lower premium and
discretionary product sales due to pantry loading.
Crude prices plummet:
Crude prices continued their downtrend, declining
37.9% sequentially in 1QFY21 and down even more sharply YoY at 54.2%.
However, prices were up 28.7% MoM at USD39.9/barrel (monthly average for
June).
Agri commodity basket saw moderate inflation/deflation in 1QFY21:
The sugar
index was up 2.2% QoQ /1.9% YoY. Copra cost was up 13% YoY/ 1.2% QoQ (YTD
May’20).On the other hand; wheat cost declined 13.6% YoY / 2.8% QoQ.
Mentha prices declined 18.5% YoY/ 7.6% QoQ. Barley cost was down 16.9% YoY
/ 27.5% QoQ. However, palm oil cost continued at high levels on a YoY basis
(+15.3% YoY), but nosedived sequentially (-14.6% QoQ). Soap makers took price
increases in March to combat the palm oil inflation.
Non-agri commodity basket, barring gold and PFAD largely saw deflation:
VAM
costs fell 28.5% YoY / 14.7% QoQ. Titanium dioxide (TiO2) costs were down 7.7%
YoY / up 2% sequentially. Up to May’20, HDPE costs declined 16.7% YoY YTD,
and LLP costs were down 8.6% YoY YTD. Gold prices (MCX Gold) expanded 34%
YoY and 5.2% QoQ. Palm fatty acid distillate (PFAD) prices were up 35.5% YoY /
down 14.9% QoQ.
On a MoM basis, the entire commodity cost basket was up by only 2.4% on
average, while plummeting 8.2% QoQ and 3.6% YoY.
Impact on top picks: HUVR, DABUR, MRCO
Hindustan Unilever (HUVR):
With PFAD costs declining sequentially (up YoY),
HUVR is likely to be the key beneficiary. Soap companies took price increases in
March 2020. Additionally, packaging costs (crude-related) are also declining
significantly, which would support gross margins. Moreover, the company’s
cost-saving measures, along with a portfolio that could straddle the price
pyramid, should aid margin improvement going forward.
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com)
Research Analyst: Pooja Doshi
(Pooja.Doshi@MotilalOswal.com) /Dhairya
Dhruv
(Dhairya.Dhruv@MotilalOswal.com)
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.