HUL, Dabur and Asian Paints May Face Margin Pressure Due to Rising Crude and Input Costs, Axis Securities Warns

Escalating US-Iran Conflict to Hit FMCG, Paints, QSR, and Retail Sectors

The escalating US-Iran conflict is expected to have a significant impact on various sectors in India, with FMCG, paints, Quick Service Restaurants (QSR), and retail being the most vulnerable, according to domestic brokerage firm Axis Securities. The firm has identified these sectors as likely to be impacted due to rising oil prices and a shortage of gas supplies.

Crude Oil Prices Surge

Crude oil prices have been trending higher since the onset of the US-Iran war on 28 February, rising over 60% so far. The surge follows supply disruptions triggered by the closure of the Strait of Hormuz by Iran, which is using the move as leverage to pressure the US to halt its attacks. India is heavily dependent on crude oil imports, sourcing nearly 85% of its requirements, with a majority coming from the Middle East.

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Sector-Wise Impact

FMCG Sector Faces Margin Pressure and Demand Risk

The FMCG sector faces a multi-pronged cost shock, not from crude oil directly as a fuel, but as a raw material embedded throughout the value chain. The most acute pressure comes from packaging materials—PET, HDPE, and specialized laminates. With these inputs accounting for 10-15% of the cost base, the brokerage expects the sector to likely witness 100-200 bps margin compression in the near term. While companies are resorting to calibrated price hikes (8-12%) and shrinkflation, demand elasticity, especially in mass categories, remains a key constraint, limiting full cost pass-through.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Paint Sector - Maximum Sensitivity to Crude

The paint sector, which is most vulnerable to energy prices, given its high dependence on crude derivatives, has already pushed Asian Paints and other companies to raise paint prices in response to rising raw material costs. However, the brokerage believes that despite 6-8% price hikes, a 300-500 bps margin compression could occur, with limited ability to fully pass on costs in a competitive environment.

QSR Sector to Face Cost Pressure, Operational Disruption

The QSR sector faces a dual shock—cost inflation and operational disruption, with 60-65% dependence on LPG for cooking. Supply constraints and rising LPG prices, along with higher edible oil and packaging costs, are impacting store-level profitability. Additionally, inflation-led pressure on discretionary spending could result in lower footfalls and reduced ticket sizes.

Retail Sector - Inflation Shock and Demand Compression

The brokerage noted that the retail sector is witnessing an inflation-led demand slowdown, as higher fuel and product prices compress consumer purchasing power. This is driving downtrading towards essentials, while discretionary segments (apparel, lifestyle) face weaker demand. At the same time, retailers are grappling with margin pressure from higher logistics costs and limited pricing flexibility, leading to a slower recovery trajectory.

Sector-Wise Vulnerability