Chennai: Inflation seldom bites into the profit margins of fast moving consumer goods (FMCG) companies as they have the leverage to raise product prices to protect themselves from rising raw material prices.
Quarterly data of the last seven years indicates that an increase in consumer price inflation is positively correlated with an increase in the operating profit margins of FMCG companies. If inflation is a threat to FMCG companies, they manage this threat very well, says a report by think-tank CMIE.
Inflation had jumped up to 6.2 per cent in 2020-21 after having remained below 5 per cent in the preceding five years. In that year of the pandemic and high inflation, consumer goods companies recorded their highest ever sales and the highest operating profit margin in well over a decade.
Cosmetics, toiletries, soaps and detergents companies recorded their best operating profit margin at 21.7 per cent in 2020-21 even as sales grew by 13.3 per cent. This fastest topline growth in seven years is based on the weighted average of a sample of over 90 listed and unlisted companies in the industry adding up to sales of about Rs 1.2 lakh crore.
Around 15 of the listed companies with sales of Rs 70,000 crore, had an operating profit margin of 24.5 per cent. This was also a record. Extraordinary margins continued into 2021-22 at 23.5 per cent and the topline continued to grow 11.4 per cent at nominal rate and 4.8 per cent at inflation-adjusted rate.
The operating margins of these listed companies dropped to 22.4 per cent in the March 2022 quarter and to 21.3 per cent in the June 2022 quarter when inflation rose to 6.3 per cent and 7.3 per cent, respectively. Still, their margins are much better than in most pre-pandemic years. Inflation-adjusted sales growth was positive. Year-on-year sales grew by 4.7 per cent in the March 2022 quarter and 6.8 per cent in the June 2022 quarter.
