New Delhi [India], May 6 (ANI): Consumer sector companies are unlikely to pass on the benefits of reduced raw material prices to the end customers and instead use this opportunity to improve their gross profit margins, according to a report by Nomura, a global financial services firm.
The report added that the gross margin of such companies will start improving from second quarter of FY 26 onwards while it will be down year-over-year in the first quarter of FY26.
The consumer price inflation (CPI) for the month of March saw a sharp decline, it dropped to a 67-month low of 3.34 per cent, mainly due to a significant decline in food prices.
The highest moderation in raw materials (RMs) is seen in Wheat, Palm Oil and Crude Oil, while inflation is still seen in Copra, Amla, Milk and Gold.
“Most raw material (RM) prices have started to moderate down after remaining inflationary over the past year. Key RMs such as palm oil, wheat and crude oil have softened rapidly by 7-10 per cent over the past month. Given gross profit margins (GPMs) are still under pressure, we believe Consumer companies will direct this softness in input cost towards improving GPM rather than cutting prices in the near-term,” the report added.
Going deep into the data, in the recent quarter, palm oil prices fell by 7 per cent quarter-on-quarter (q-o-q) and 8 per cent month-on-month (m-o-m), though they are still up 20 per cent year-on-year (y-o-y).
It is expected that the palm oil prices will stay stable at these levels for the next few quarters, which could help improve gross margins (GPMs) for food companies.
Wheat prices also dropped by 11 per cent q-o-q, helped by a good rabi harvest. This should further ease margin pressure for food companies, the report added.
Brent crude oil and HDPE prices declined by 10 per cent and 7 per cent y-o-y respectively. This is an opportunity for paint companies, as well as consumer goods companies with packaging costs linked to crude oil.
The report mentioned that Robusta coffee prices eased slightly by 4 per cent q-o-q but are still up 29 per cent y-o-y.
Prices of palm fatty acid distillate (PFAD), used in making soaps, fell 3 per cent q-o-q and 5 per cent m-o-m. Now, with PFAD softening, the companies in the sector will see their margins improving.
Sugar prices stayed flat q-o-q after being inflationary for a while, which should benefit food companies, the report added. (ANI)
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