Shares of most fast-moving consumer goods (FMCG) companies were again trading lower in the morning session on October 10 after quarterly updates pointed to softening demand and margin pressure amid high inflation.
At 11.33 am, equity benchmarks the Sensex and the Nifty, too, were trading around a percent lower. Amid worries about further tightening by the US Federal Reserve, a global slowdown and soaring energy prices. Investors are also waiting for India’s inflation data for the month of September to be released on October 12
Since the start of October, Marico has dropped 7 percent, Godrej Consumer Products lost 10 percent, Hindustan Unilever 6 percent, Dabur India 6 percent, Tata Consumer Products 4 percent and ITC has lost around 3 percent. BSE FMCG index is down 2 percent.
Inflation bites
In its recent quarterly update, Godrej Consumer Products said it expects a mid teen decline in margins due to high cost of materials, a significant upfront marketing investment to drive category development and a weak Indonesia performance. Volumes are also expected to remain in single mid-digit levels.
Maker of Saffola and Parachute, Marico Ltd said its domestic business posted low single-digit volume growth with a three year CAGR in high single digits.
Also read: Fears of Fed rate hike, dull earnings, sinking rupee and all that drive market into red
It expects margin to contract sequentially. Higher cost inventory consumption and currency depreciation are expected to have some impact on profitability.
The geopolitical situation continued to impact the business with unprecedented inflation during the quarter leading to weak demand, Dabur India has said.
Soaring inflation in the second quarter may lower its operating margin by around 150-200 basis points year on year, it said.
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Better quarters ahead?
The three firms, however, said the consumption growth would improve in the second half of the year amid expectations of moderating inflation and with the support of the festive season.
Analysts, however, don’t expect inflation to moderate soon. The impact of Covid-19, the Russia-Ukraine war and the energy crisis in Europe is fuelling inflation, they said.
The continued surge in crude oil and rise in dollar index are likely to take a longer time to moderate inflation, analysts added.
Crude oil has surged to $97 a barrel from $85 in the last week, with the dollar index going past 112 from 109 in the last month.
Also read: Rupee weakens to record low of 82.70 a dollar on Emerging Market losses, Fed fears
India’s consumer price inflation data for September will be out on October 12. According to Bloomberg estimates, the CPI for September will be at 7.3 percent from 7 percent a month ago.
The demand sentiment trend for the second quarter of the financial year 2022-23 would be similar to that of the first quarter. With higher inflation impacting margins, rural demand continued to be weak in the September second quarter.
"Rural markets continued to witness lower growth compared with urban. Deficit rainfall hit distributors’ sales in Northeast markets, especially in household insecticide (HI) and discretionary categories,” analysts at Elara Securities said in a note to investors.
"We expect our FMCG universe to report a revenue growth of 14.4 percent YoY in Q2FY23E (three-year CAGR of 11.4 percent), with muted volume growth of 4 percent YoY (3 percent ex-cigarettes), as we anticipate an average realisation of 10-11 percent YoY, led by price hikes in the past 3-4 quarters to counter raw material inflation.”
Soap, laundry and dishwasher performed better led by market share gains by organised players in-line with Q1. Health care saw a drop in volume due to a higher base. Cigarettes continued to see volume uptick due to increased mobility, the note said.
"For Q2FY23, we estimate a gross margin dip of 210bps YoY (ex-ITC, down 260bps YoY), and EBITDA margin decline to be lower at 140bps YoY (ex-ITC, down 170bps) led by prudent cost control.
“We expect our FMCG universe to post an EBITDA growth of 8.2 percent YoY (ex-ITC growth of 3.4 percent YoY). Nestle, Godrej Consumer Products, Emami and Bajaj Consumer Care may see higher dip in EBITDA margin (~300-700bps contraction YoY),” Elara Securities said.
EBITDA is earnings before interest, tax, depreciation and amortisation; a key measure of profitability for companies
Brokerage firm Kotak Institutional Equities expects stable volume and value growth trends (3-year CAGR) across consumer packs despite inflationary pressure and further price hikes.
It expects ITC, Hindustan Unilever, Nestle India, Varun Beverages, United Spirits and Westlife Development Ltd to report a good print, whereas Tata Consumer and Sapphire would report a soft quarter.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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