The world is gradually attaining normalcy from the Covid-19 induced economic recession. Nonetheless, the severe impact of the pandemic continues to weigh on the global economy with one such effect being the rise in commodity prices across the globe. Lower availability of raw materials, labour, logistics and stronger than anticipated demand etc are causing supply chain bottlenecks (disruption) and driving commodity prices higher.
Trivia WPI (Wholesale Price Index) reflects the increase/decrease in the prices of goods used by producers
India’s latest WPI data indicates high input cost pressure on the producers. The rise in raw material prices leads to lower profitability for companies, which are presently not passing the elevated costs to end consumers (but may pass gradually going forward).
The transfer of increased raw material prices to the final consumers can help relieve cost pressure on the margin, but industry this has not happened as is evident in the CPI chart given below. We can understand looking at the CPI numbers that it has moderated in the recent time significantly from the higher levels of 6% to 4.4% during the month of Sept’2021 due to the higher base and limited passage or transfer of input cost prices from the producers to end consumers.
The strategy of not passing down the full increase of raw material prices by the industry leaders to the final consumers results in significantly lower profitability for unorganized and smaller players. The industry leaders and big players utilise their strong financial strength and operational efficiency to absorb the increased raw material by impacting their profit margins and tend to impact the smaller players, who struggle to sustain lower margin, resulting in grabbing the market share from small players.
Trivia CPI (Consumer Price Index) reflects the increase/decrease in the prices of goods used by consumers
In FMCG sector, one of the market leaders recorded strong double-digit growth and 7.45% of operating profit growth during the September ended quarter whereas a smaller player that created a strong brand resonance over the years recorded drastic fall in EBITDA margin by 529 BPS (1 BPS=0.01%) on account of the cost pressure prevailing in the market. Thus, it reflects the strong capacity of the industry leaders to absorb cost hikes and volatility.
Similarly in the chemical sector, one of the industry leaders recorded strong revenue growth of 36% during September ended quarter 2021 and gained market share as well during the same quarter but their operating profit declined 17% as they have not passed down increased raw material prices to consumers whereas one of the smaller players recorded only 16% revenue growth due to losing the market share to the bigger players and recorded 36% decline in operating profit.
Once the larger and efficient players start passing down the prices towards the end consumers, it would help the bigger players increase profitability as well. It is thus important to look at market leadership attributes, historical and future earning visibility & capability of companies while investing.
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