FMCG Q1FY23 preview: Inflation may dent volumes, margins for another quarter

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FMCG majors are set to report another quarter of weak performance as their margins and volumes continue to decline on inflation-triggered demand slowdown.

Two major companies—Marico and Dabur—have hinted at an impact on their performance, following tepid demand, inflation and trends like down-trading.

“Current trends indicate that consumers titrated consumption in some non-essential categories and either down-traded to other brands or switched to smaller packs in the essential categories,” Marico said in its quarterly update to the exchanges.

Rival Dabur, too, said that consumption pressure continued across the sector on account of unprecedented inflation in the first quarter of the financial year 2023 (Q1FY23). “This has impacted the share of the income available for spending on consumer staples,” Dabur’s quarterly update said.

Analysts, in their preview reports, have indicated that most of the companies will report lacklustre performance due to these sustained challenges in the operating environment.

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Declining volumes

Marico and Dabur have indicated a fall in sales volumes in several brands, especially the ones positioned in the healthcare and immunity categories.

Marico said its India business volumes declined in mid-single digits in the first quarter. While the company’s flagship brand, Parachute Coconut Oil, recorded a minor volume decline, Saffola Oils declined in double-digits due to a high base of Q1FY22 and significant down-trading from super-premium to the mass segment in edible oils.

“The foods segment also had a slow quarter due to the high in-home consumption base in oats and a sharp decline in immunity-led categories like honey, among others. The premium personal care category posted robust growth across all segments of the portfolio,” the company said.

Dabur, on the other hand, saw a relatively better performance in most of its categories and reported a mid-single-digit volume growth. Its food and beverages verticals, which include the juice brand, Real, saw strong double-digit growth in the quarter on the back of improving out-of-home consumption and a decent summer season.

The company said that the home and personal care portfolios are expected to record a high single to low double-digit growth on a high base in Q1FY22.

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However, its healthcare and immunity portfolio, which includes brands like Dabur Honey and Dabur Chyawanprash, is expected to report a decline, given the high base of the corresponding period last year when the segment grew multi-fold due to the second wave of COVID-19.

Reports by brokerages expect a similar trend for other FMCG companies, too. According to Axis Securities, the volume growth for most of the staple companies (ex-ITC) under its coverage will be in the low to mid-single digits, while revenue growth will, primarily, be price-led.

“Volume growth in the first quarter has picked up sequentially, especially in urban markets, but the rural segment continued to remain weak on account of high food inflation eating their share of wallets,” the brokerage said. Grammage reduction, down-trading, and price hikes, it said, will further put pressure on volume growth.

Edelweiss pegs that the average volume growth for the sector will be 12.2 percent year-on-year (YoY), primarily driven by a soft base. It expects urban growth to be faster than rural growth for most companies.

Margin woes

Despite several rounds of price hikes and a downward trend in the prices of key inputs like edible oil, margins remain under stress in Q1. Marico, for instance, said its gross margin is expected to expand YoY, but remain near the same levels as the preceding quarter.

Dabur indicated that despite the judicious price increases and cost-saving initiatives, operating margins are expected to be lower by around 200 bps, compared to Q1FY22.

“During Q1 of FY22 and FY21, operating margins were higher than normal due to a COVID-led surge in the healthcare vertical,” Dabur said.

Axis Securities said gross margins across staple companies are likely to remain under pressure as is evident from the broad-based inflation across raw materials. However, the greater part of the increase in raw material prices has reached its peak and would start easing off in the upcoming quarters. The brokerage expects to see the impact of a fall in commodity prices only in the second half of FY23.

Edelweiss projects that continued inflationary pressures will further pain the companies on both the gross margin and EBITDA margin fronts (except Marico).

“Companies like HUL, Asian Paints, Britannia and Pidilite hiked prices further in Q1FY23. Ad spending will be cut sharply by most companies. On a three-year basis in terms of EBITDA margins, Britannia and Emami have performed well, while Bajaj Consumer and United Spirits have seen the highest decline,” said the brokerage.