Aditya Hadi, Jakarta – Consumer goods and pharmaceutical firms including Mayora and Kimia Farma have been struggling to maintain profitability despite steady sales growth, partly because a depreciated rupiah has driven up the cost of imported raw materials.

Analysts say the Indonesian currency could remain under pressure throughout this year and suggest investors turn to "defensive" consumer stocks, like Japfa, Alfamart and Indomie, to weather a phase of volatility.

PT Mayora Indah saw its net sales grow 14.5 percent to Rp 36.1 trillion last year, fueled by strong demand for consumer staples like Kopiko and Beng-Beng. Yet the company's net profit slipped 6.3 percent to Rp 3 trillion as its gross margin shrank from 26.7 percent to 23 percent.

The same pattern hit other fast-moving consumer goods (FMCG) companies, including industry heavyweight PT Unilever Indonesia and PT Ultrajaya Milk Industry & Trading Company, which saw their bottom lines plunge 29.8 percent and 2.6 percent, respectively.

The weak earnings weighed heavily on stock prices.

A February report by global investment firm Morgan Stanley highlighted that Indonesian consumer stocks underwent a 12 percent de-rating in 2024, now trading at a 33-percent discount to their five-year average forward PE multiples.

The firm attributed this slump to sluggish growth, political uncertainty, corporate governance concerns, rising capital costs and rupiah fluctuation. It also noted a spillover to the broader market, with some companies delivering solid earnings but still facing declining valuations.

The Indonesia Stock Exchange (IDX) Composite index, a benchmark of Jakarta-listed companies, has performed dismally so far this year when compared to other markets of the wider region, with a sudden drop on in the morning session on Tuesday prompting the bourse to briefly suspend trading.

Abyan Habib Yuntoharjo, a research analyst at local brokerage Mirae Asset Sekuritas, said local consumer firms were facing fundamental pressures. Unilever Indonesia, for one, was grappling with transformation costs as it was revamping production processes.

"Mayora, on the other hand, is feeling the squeeze from surging raw material prices and rupiah depreciation, which are driving up costs," Abyan said in February. "Rising cocoa and coffee bean prices are eroding the company's gross profit and limiting its earnings per share growth."

Cindy Alicia Ramadhania, a research analyst at another local brokerage, Sinarmas Sekuritas, echoed that sentiment, identifying rising raw material costs as a key factor behind declining net profits in the consumer sector.

She warned that the situation could worsen if a trade war triggered by the protectionist United States trade policy under President Donald Trump fueled further volatility in commodity and forex markets, with risks for the rupiah.

"If these companies can find ways to mitigate rising commodity costs, their bottom-line performance could improve," she told The Jakarta Post on March 11.

Ezaridho Ibnutama, head of research at NH Korindo Sekuritas Indonesia, pointed out that pharmaceutical companies like PT Kalbe Farma and PT Kimia Farma were similarly under pressure from raw material costs.

Kalbe Farma took a hit to its bottom line in 2023 with net profit dropping 18.2 percent year-on-year (yoy). While it managed a 15 percent yoy increase in net profit to Rp 2.4 trillion in the first nine months of 2024, its gross margin dropped slightly from 39.5 percent to 39.3 percent, illustrating its vulnerability to imported raw material costs driven by a weakening rupiah.

State-owned pharmaceutical firm Kimia Farma fared even worse, more than doubling its net loss to Rp 421.8 billion, while its gross margin plunged from 36.5 percent to 29.9 percent.

Ezaridho expects the rupiah to remain under pressure until the end of 2025, particularly as the US-China trade war was dragging on and Indonesia was failing to attract enough investment from companies looking to relocate production facilities from China in the hope of improving their access to the US market.

Despite a sharp correction that has made consumer stocks more affordable and the potential for rising consumer spending power this year, Morgan Stanley also warned of lingering risks, including a resurgence of high inflation and further rupiah depreciation.

"A weaker rupiah could dampen consumer sentiment and squeeze gross margins for select consumer companies [this year]," Divya Gangahar Kothiyal, an equity analyst at Morgan Stanley, said in the February report.

Defensive options

Despite these challenges, analysts see opportunities in select consumer stocks that tended to prove resilient during economic downturns. Investors often shift funds from riskier assets to these defensive plays to wait out market volatility.

Abyan from Mirae Asset Sekuritas recommended PT Sumber Alfaria Trijaya, arguing that consumers would continue buying groceries in its convenience store chain Alfamart regardless of economic conditions. Unlike food manufacturers, the convenience store chain was not directly impacted by rising raw material costs.

He also pointed to instant noodle giant PT Indofood CBP Sukses Makmur (ICBP) with its popular brand Indomie, which is often classified as an "inferior good" that sees higher demand when consumers tighten their belts.

"ICBP's growth remains robust, with around 20 percent bottom-line expansion, excluding forex losses," he noted.

Meanwhile, Cindy from Sinarmas Sekuritas highlighted poultry producer PT Japfa Comfeed Indonesia as another option, citing its achievement in tripling net profit to Rp 3.2 trillion last year, supported by a 9 percent rise in revenue to Rp 55.8 trillion.

Ezaridho, however, prefers companies in the palm oil sector, which continues to benefit from strong demand in Asia, Europe and America.

"These firms are actively pursuing corporate actions and are less affected by political turmoil," he noted.

Source: https://asianews.network/weak-indonesian-rupiah-to-weigh-on-consumer-pharmaceutical-firms-this-year