HUL, Britannia and ITC can now breathe easy say analysts – from inflation and even stagflation worries
- The Indian government recently announced a wheat export ban, flip-flopping on its stance the week before.
- It added curbs on sugar exports and exempted import duties on palm oil, which could cool down the rising prices of raw materials of packaged food products.
- This could provide some much-needed relief to FMCG companies like
HUL, ITCand Britannia, among others, say experts.
Apart from lightening the load on grocery bills, the moves can aid FMCG giants like
While inflation is a phenomenon in which prices of goods and services increase, stagflation takes inflation and combines it with slow economic growth and high unemployment. Picture high prices of everything and consider that your incomes fail to keep up with this – you are essentially making less money than before.
Packaged food companies like Nestle and Britannia get a respite
Analysts, though, have welcomed the government’s decision, saying it will bring a much-needed respite to packaged food companies like Nestle and Britannia.
Wheat, sugar and palm oil account for 40-60% of the total cost of raw materials involved in making biscuits, noodles, bread, beverages, among others.
“Packaged food companies were facing hyperinflation across the readymade basket as international prices for most of the raw materials were trending at all-time high post-Russia-Ukraine war and the imposition of the export ban on palm oil by the Indonesia government last month,” Naveen Kulkarni, the chief investment officer at Axis Securities told Business Insider.
This, combined with Indonesia’s decision to lift the ban on palm oil exports is expected to provide immediate relief to Hindustan Unilever and Godrej Consumer, Kulkarni explained, stating that palm oil accounts for 20-25% of the raw material cost of these companies.
However, it is worth noting that the decision to ban export of wheat is a pre-emptive measure, intended to prevent wheat prices in the country from rising. An unintended outcome of this could be a surge in the price of wheat alternatives like rice, said Sonal Varma, chief economist for India at Nomura.
How will the FMCG sector perform in the near future? @AkhileshJat, an Analyst at CapitalVia Global Research Ltd. said "Demand for FMCG companies is projected to suffer for at least the next six months, as growing inflation threatens company margins. We are in a position where input costs are rising, and companies are unable to pass this pressure on to customers. In addition to the increased inflation, the volume of business is likely to decline. However, investors might place bets in this protective sector after considering the turbulent market conditions. The demand may improve in the upcoming quarter ahead of significant steps taken by the government to control inflation. The Nifty FMCG index is expected to break out above the 38800 mark on a technical basis. In the next 8-12 months, we should expect a 15-18% increase in $HINDUNILVR.NSE and $ITC.NSE"— (@CapitalViaGlobalResearch) May 27, 2022
Consequently, this move could impact farmer revenues. “With domestic cereal price inflation still on the rise, the current export ban could also be long lasting, if global food prices remain elevated,” Varma further added.
It seems that the government has heeded to warnings by the top bosses of India’s FMCG giants. Will it pay off or not is something that only time will tell. Until then, buckle up.
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