Geopolitical Scenario: Consumer firms unlikely to hike prices for now; most companies protected on input costs for next quarter

By Shubhra Tandon & Varun Singh

Automobile and FMCG firms facing the prospect of escalating input prices in the aftermath of the Ukraine crisis are likely to hold on to any price hike, at least till the first quarter of FY23, to gauge how the geopolitical situation pans out. Even air carriers, who are reeling under high aviation turbine fuel prices but have recently witnessed an uptick in traffic, are unlikely to raise fares anytime soon.

Industry executives said that FMCG companies have already hiked product rates in recent times due to elevated commodity prices to the extent possible without risking demand and are covered at least for the next three months due to long-term contracts.

Similarly, most auto firms in the passenger vehicle (PV) category raised prices in January itself and therefore the earliest they are likely to take stock for another round of hike would be in April. “There’s no clarity at the moment as to how the Ukraine crisis will pan out, so we will have to wait and watch,” RC Bhargava, chairman, Maruti Suzuki India, told FE.

So far during the current fiscal, Maruti Suzuki and most other PV manufacturers have already hiked prices four times. Normally, they do so twice a year.

Two-wheeler manufacturers are already reeling under the impact of low demand on the back of high ownership cost due to transition to BS-VI norms as well as high fuel prices, so they can’t afford to look at any price hike in the near future.

Analysts said that the current geopolitical crisis due to tensions between Russia and Ukraine is expected to result in further inflation in commodity prices, which have remained high over the past few quarters due to global supply chain disruptions. However, with demand returning with the Covid-led restrictions being eased, the companies want to tread cautiously.

“In categories where demand is inelastic, we have been raising prices to cover the inflationary cost but where the products are discretionary in nature like personal care, haircare and home care segments, we have not passed on the entire cost to the consumers to sustain demand,” an executive with one of the leading FMCG firms said. “Commodity prices have been at elevated levels but which way would they move we need to see over the next quarter before taking any decision on price hikes,” the executive added.

Inflationary pressures impacted rural demand of Hindustan Unilever (HUL) during the third quarter as 30% of its business comes from price-sensitive packs. The company’s volumes halved to 2% during the quarter from 4% a year ago, primarily due to reduction in grammage undertaken by the company in lower-priced packs consumed mostly in rural India.

So, even before the current geopolitical scenario played out, the Street had pencilled in a high raw material inflation scenario expecting that the global supply chain disruptions will continue in the coming quarters. Consequently, consumer goods companies were expected to report lower gross margins over the next few quarters, rather than risking a fall in demand due to passing on of prices.

Airlines, which saw a surge in traffic in December but again a dip in January due Omicron-led restrictions, are looking to regain passenger load factor and hence are unlikely to raise tariffs soon.