ITC, HUL, Marico, GCPL: Will RM inflation hit Q1 margins? Targets

Nomura India, in a fresh note on consumer stocks, said an inflationary trend is seen in crude and crude derivatives and palm oil, while a deflationary trend is being observed in copra and coffee, among others. For the ongoing June quarter, the foreign brokerage sees Britannia Industries Ltd, Nestle India Ltd and Marico Ltd as the least impacted FMCG companies in terms of raw material (RM) inflation.

Companies such as Hindustan Unilever Ltd (HUL), ITC Ltd, Tata Consumer Products Ltd and Godrej Consumer Products Ltd (GCPL) are seen as moderately impacted, while Colgate-Palmolive and United Spirits are the highest impacted consumer companies.

"Given that we will be entering a volatile demand and margin environment, we remain positive on select names in our coverage staples that have strong brands, resilient portfolios, pricing power and strong execution. We believe companies with increased exposure to crude / derivatives should face a higher impact on margins, while food companies will see a lower impact on margins from Q1," Nomura said. It prefers GCPL and Tata Consumer among consumer staples. 

Nomura said the West Asia conflict has led to an inflation in almost all raw materials, especially packaging materials, which is largely mid-to-high single-digit as a percentage of sales, which Nomura believes could be the main reason for driving cost inflation and thus triggering price hikes.

"While RM inflation cycle began in March, we believe that Q4 margins will not be impacted
as the companies will have inventory, which will likely continue till mid-Q1. Thus, we
expect Q1 to see a partial impact and the mid-single-digit to low double-digit cost inflation
can be mitigated by low-to-mid single-digit price hikes without much volume pressure," Nomura said.

Target prices for ITC, others

The brokerage suggested 'Buy' on seven out of eight stocks. It suggested a 'Reduce' on Colgate Palmolive. Its targets stood at Rs 2,600 for HUL, Rs 1,500 for Nestle, Rs 7,275 for Britannia, Rs 1,525 on Godrej, Rs 1,450 for Tata Consumer, Rs 900 for Marico, Rs 600 for Dabur and Rs 2,050 on Colgate.

It said Q2 will see the full impact of this inflation, which if continued, will warrant high-single-digit or double-digit pricing growth to mitigate the pressure, which can impact volumes, more so in rural areas, given the forecast of below-normal monsoon.

Least impact 
Marico Ltd could benefits from copra price correction, which may outweigh the impact from higher packaging cos. Nomura said. It said foods companies such as Nestle India and Britannia, given their RM basket, is seeing the least inflation. Nomura expects them to be the most resilient among peers in the current changing raw material landscape. 

"Stable wheat and sugar prices along with softening milk prices should partly offset the impact from rising palm oil and packaging costs, in our view. However, higher-priced milk inventory for some part of Q1 could add some pressure on GPMs in Q1," it said..

Moderate impact
For Dabur, the recent inflation in LLP, and HDPE may limit the benefits from lower-priced amla inventory. For Marico, Copra prices being 35 per cent below the peak could outweigh the impact from upward bias in LLP, HDPE and edible oils. However, Nomura believes that price cuts in March and anniversarisation of price hikes will limit the margin expansion.

In the case of HUL, higher prices of crude-based commodities, with palm oil remaining inflationary despite lower-priced tea and robusta coffee, could impact margins in Q1. However, HUL has taken small price hikes in tea, salt and detergents, which can help cushion the impact.

For GCPL: "While high exposure to crude and its derivatives and palm oil / PFAD could increase the cost pressure, we note that the company had highlighted that it will maintain its margins," Nomura said.

For ITC, leaf tobacco prices are down 7 per cent YoY, which is supportive for margins. The price increases taken by the company at 30 per cent are lower than the recent tax hikes of 40 per cent, which is likely to pressure margins. That said, media articles suggest that certain price hikes are likely, which will cushion the impact on margins.

Negative impact
Nomura said despite the softness in maize prices, the inflation in crude-based commodities, higher mentha oil prices and Colgate's higher saliency in terms of packaging costs will impact CLGT’s margins.

For USL, higher glass prices may impact gross margins from Q1 onwards. While lower-priced tea inventory should support Tata Consumer margins, the recent HDPE price inflation, supply chain disruptions causing higher freight
costs, and increase in coal consumption costs can impact margins. Furthermore, lower coffee costs are likely to drag margins for the non-branded business, Nomura said.