FMCG Q4 Preview: Staples set to report another disappointing quarter

Fast-moving consumer goods (FMCG) companies are set to report another disappointing quarter, indicate analysts, as demand remains tepid while inflation on an upward trajectory continues to dent their margins.

“Facing dual headwinds of weak demand and raw material inflation, consumer staples would see weak earnings print in the fourth quarter, characterised by muted volume growth and year-on-year (y-o-y) margin compression,” said a report by Jeffries.

Companies operating in the discretionary products segment, however, are expected to report a better performance in the fourth quarter. Discretionary products have witnessed a surge in sales with the return of normalcy and easing of Covid-related curbs.

“Even as we note growth moderation in certain discretionary categories, we expect discretionary pack to outperform staples on underlying three-year revenue CAGR (compound annual growth rate)—we estimate staples/discretionary (ex-ITC) pack to register 7-14 percent three-year revenue CAGR,” said a note by Kotak Institutional Securities.

The brokerage expects jewellery retailers to report strong revenue helped by market share gains, while it expects further demand recovery for alcoholic beverage companies.

Paints companies, too, indicated brokerages, are expected to report revenue growth as a result of price hikes. Margins, however, will continue to be stressed given the high inflation in crude oil derivatives.

Battered by inflation for several quarters now, FMCG companies were hopeful that a declining trend would start with the closing of FY22 and that pressure would finally ease off in the second half. However, the Russia-Ukraine war, which has triggered a price rise in several key commodities, has dashed these hopes.

Companies such as Marico and Godrej Consumer Products reported a decline in FMCG volumes due to the weak demand scenario.

“During the quarter, consumption trends remained subdued amidst weak rural sentiment and inflation in global commodities aggravating due to geopolitical tensions. While companies effected price hikes across FMCG categories to cope with the cost push, persistent inflation continued to hurt consumer wallets across rural and urban. As a result, FMCG volumes declined in the January-February 2022 period on a year-on-year basis as per Nielsen,” said Marico in its quarterly update.

The company reported low single-digit revenue growth in the quarter, while volumes were marginally positive on an exceptionally high base (25 percent), leading to a double-digit volume growth on a two-year CAGR basis.

Godrej Consumer said it expects to deliver a higher than mid-single-digit sales growth and a two-year CAGR around mid-teens.

“On the profitability front, we expect lower year-on-year EBITDA (earnings before interest, tax, depreciation and amortisation) margins during the quarter. This is due to input inflation and our weak performance in Indonesia,” it added.

The third quarter of the fiscal 2022 had also seen a decline in volumes for several FMCG companies. Companies such as Hindustan Unilever, Godrej Consumer Products, Emami and Marico registered low to flat volume growth as demand for their products declined. HUL reported volume growth of 2 percent in the quarter ended December compared with 4 percent growth in the second quarter.

According to Jefferies, HUL is likely to see 1 percent volume decline, 8 percent revenue growth and a y-o-y margin contraction.

“ITC cigarette Ebit should grow 10 percent, with volume up 9 percent. Britannia, Colgate, Marico and Emami would likely see muted 0-3 percent volume growth, with y-o-y margin decline and weak Ebitda growth,” it said.

Dabur, said the brokerage, is likely to see pressure in health and personal care and healthcare, partly offset by foods. “Margin pressure could dent Nestle's Ebitda, despite good volume growth,” it added.