Daily consumer use items like detergents, packaged snacks and cooking oils may see price increase by 4-7% after petrol and diesel prices rose to a record just when the rural demand is showing signs of uptick.
Why is this important
The government had earlier slashed GST rates on some of the consumer staple items from 28% to 18% which helped the FMCG companies lower prices. Further expectation of good monsoon and minimum support price mechanism had helped to increase rural demand. Visit our earlier blog on increase in rural demand posted on 21st May,2018 with link to news article
However, due to sharp rise in crude oil prices, it has now become necessary for consumer staple companies to increase prices by 4-5% if the prices of crude remains firm for next 2 quarters as petroleum derivatives are used in packaging material including bottles and tubes used in shampoos, detergents, soaps etc and form 15-20% of raw material used in packaging.
Stock to be impacted
The news is negative for consumer staple companies like Colgate Palmolive (India) Ltd (CMP: Rs 1237, M.cap: Rs 33644, 36x FY20E PE). However, companies like KRBL (CMP: Rs 515, M.cap : Rs 12122 cr, 27x TTM PE) who export a chunk of their products to middle east countries tend to benefit with rise in crude oil prices as discretionary spend of people in Middle east countries tend to increase with rise in crude oil prices as their economy is oil driven.