Commodity inflation could pinch sharply in FY22
Soaring input costs are starting to squeeze profit margins, prompting companies in certain industries to take cautious price increases. However, the uncertainty of demand due to the brakes will make it difficult for some to rise in prices, analysts say.
“While consumer durables, FMCGs and automotive original equipment manufacturers pass on much of their input costs with a shorter lag, other segments will feel the pinch for a while. quarter or two. However, the important element is the demand path, and generally we would see input costs largely passed on if the overall demand path remains robust, ”said Pankaj Pandey, research manager at ICICI Direct.
As commodity prices continue to climb, management comments on margins have darkened.
A mint Analysis of 294 manufacturing companies (excluding metals and mining) shows that their input cost or the cost of raw materials as a proportion of net sales has jumped to at least a 20-quarter high of 32.67% in the March quarter (Q4), up from 16.74% in The net sales growth of these companies also improved to 27.41% year on year in Q4 from 10.01% in Q3, while net profit adjusted (against one-time profit or one-time loss) was 134.78% compared to 50.11% in the previous three months. However, the net profit margins and operating profit margins of these companies narrowed to 6.20% and 16.26% in Q4, from 9.30% and 20.18% in Q3, respectively.
Gautam Duggad, head of research, institutional equities at Motilal Oswal Financial Services, said autos, consumer staples and durable goods would be strongly affected by rising commodity prices.
“In the banking sector, corporate deleveraging has had an additional impact on credit growth. More importantly, the rise in inflation could signal the end of the monetary easing cycle, which has contributed to the steadily declining cost of financing the system, generating healthy margins, ”he said.
The metals and oil and gas sectors (upstream companies) are however expected to remain the main beneficiaries of the rising costs. For every change of $ 5 a barrel, the earnings per share of ONGC and Oil India change by 10% and 16%, respectively, Duggad said.
“While the rise in commodity prices only benefits 11 companies or 22% of Nifty’s constituents, the share of these companies’ profits in Nifty FY22 profits would be around 36%. On the other hand, the 13 Nifty components that are negatively impacted by rising commodity prices would only contribute 11% to Nifty FY22’s profit pool, ”Duggad added.
For Bajaj Auto, input costs rose 4-5%, against which the company took 4% price increases in stages. The two-wheeler manufacturer’s Ebitda margin contracted 60 basis points (bps) year-on-year and 170 bps year-on-year to 17.7% in the fourth quarter. The firm expects another 300bp impact in Q1FY22, for which it took a 1.5-2% price hike in April.
Likewise, Britannia Industries Ltd faced an overall commodity basket inflation of 3%, with sharp increases in palm oil and milk prices in the fourth quarter.
“On a comparable basis, there is likely margin squeeze at HUL due to significant inflation in tea and palm oil. HUL took calibrated price hikes. Marico did quite well, given the significant inflation in the prices of copra and edible oils. Dabur’s EBITDA growth was in the lower tier due to high ad spending and calibrated price increases, ”said Abneesh Roy and Tushar Sundrani, analysts at Edelweiss Securities Ltd.
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