Nestle India Ltd expects the price of commodities to surge globally and to some extent locally because of supply chain constraints, the maker of products including Nescafe instant coffee, Kit Kat chocolate bars and Maggi noodles said in its annual report for 2021.
Last year, commodity prices increased substantially, and the trend is set to continue in the quarters ahead, Nestle India said.
“Input prices are expected to be on a bullish trend both globally and to some extent locally. Fresh milk prices are expected to remain firm with continued increase in demand and rise in feed costs to farmers,” the annual report said.
Commodity prices soared in 2021 following a broad-based decline in 2020, the report said, with prices of several commodities hitting record highs.
“Food prices shot up by 22 percent in 2021, reaching their highest levels in a decade, with sharp increases in vegetable oils, cereals and dairy prices,” it added.
In February, Nestle India Managing Director Suresh Narayanan told journalists that higher inflation is here to stay and as a result the company was considering “judicious price hikes” going ahead.
Nestle is grappling with inflation in key commodities and raw materials such as arabica coffee, edible oils, sugar, wheat flour, skimmed milk powder, aluminium, plastic, paper and so on.
Margins hurt
The prices of several of these products are at 10-year highs. Nestle’s gross margin in the December quarter dropped by 205 basis points year-on-year. One basis point is one-hundredth of a percentage point.
In the December quarter, Nestle hiked prices in the range of 1-2 percent.
Nestle India’s revenue from operations climbed to Rs 14,709 crore in 2021 from Rs 13,350 crore in 2020. It earned a net profit of Rs 2,145 crore in the year, a 3 percent rise over Rs 2,082 crore in 2020.
Throughout 2021, makers of packaged consumer products, or fast-moving consumer goods (FMCG), struggled with inflation in the prices of key inputs that hurt their growth and dented profit margins.
Most companies had been expecting relief in the quarters ahead, but the war between Ukraine and Russia and subsequent disruptions in supplies of several commodities and higher fuel prices is again stoking inflation.
“After some level of stabilization towards the end of CY21, key inputs are witnessing another bout of inflation. Concerns are particularly high for palm oil and crude oil prices, which are up 40-50 percent in the last three months on top of a 30-40 percent jump in CY21,” said a report by Jefferies.
“The Russia-Ukraine crisis has also been pushing up prices of wheat and edible oils, and this may have ripple effects in India, although the extent may be lower given the inward nature of the market,” it added.
