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Consumer staple Q2 preview: Shrinking margins, steady revenue show expected

Analysts expect margins to dip as rising cost pressures rear their ugly head, hurt profitability

October 12, 2021 / 02:58 PM IST

The Nifty FMCG Index has gained around 18 percent so far this calendar year. Shares of many consumer staples firms are trading at pricey valuations. The moot point then is whether the upcoming September quarter results (Q2FY22) would live up to those expectations.

That’s unlikely given that analysts expect margins to dip as rising cost pressures rear their ugly head, hurt profitability. Now, while companies have taken price hikes, it may not be enough to offset high costs.

“The September quarter would be the seventh consecutive quarter of commodity-cost inflation-led gross profit margin (GPM) compression for HPC & Foods businesses,” said analysts from JM Financial Institutional Securities Ltd in a report on October 8. HPC refers to the home and personal care segment. The brokerage firm estimates aggregate HPC and foods’ GPM for stocks under its coverage to compress by 201 basis points (bps) (was -226bps during the June quarter) while Ebitda margin compression is forecasted to be relatively lower at 100bps (was -193bps in the June quarter).

One basis point is one-hundredth of a percentage point. Ebitda is earnings before interest, tax, depreciation and amortisation, a key measure of profitability for companies.

In general, companies are expected to witness some moderation in advertising and promotion spends. This, along with an operating leverage benefit, is likely to offer some cushion to Ebitda margin compared to gross margin performance.

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In its pre-quarterly update last week, Godrej Consumer Products Ltd (GCPL) said it expects operating margins to contract in Q2 driven by a lag between the rise in input costs and increase in end consumer pricing. Marico Ltd expects its gross margin to improve marginally sequentially, but will be under pressure year-on-year due to much higher year-on-year input costs. In its pre-quarterly update, the firm said, “Among key inputs, copra prices corrected further, crude remained firm, while edible oil prices oscillated at higher levels.”

For Hindustan Unilever Ltd (HUL), inflation in palm oil, tea and crude oil prices would be the main culprits that adversely impact its gross margins in Q2. Kotak Institutional Equities has modelled a 200bps year-on-year (y-o-y) fall in gross margin for HUL due to inflationary pressures and 55bps quarter-on-quarter (q-o-q) improvement in gross margin aided by price hikes. The brokerage estimates HUL Ebitda margin at 24.7%, down 40 bps y-o-y and up 80 bps q-o-q.

While margin performance isn’t thrilling, revenue performance is expected to be steady and that’s encouraging. Price hikes are expected to aid growth. “Revenue growth is aided by price hikes for Tata Consumer Products Ltd (tea), HUL (tea, soaps), GCPL (soaps), Marico (edible oils) and Colgate Palmolive (India) Ltd (toothpaste),” said Kotak’s analysts in a report on October 7. Overall, the brokerage firm estimates consumer staples firms in its coverage to see two-year revenue compound annual growth rate (CAGR) of 9%. Given the covid-19 pandemic-led disruptions, it makes sense for investors to use the two-year CAGR to evaluate growth.

Analysts from Emkay Global Financial Services Ltd said in an October 8 report, “Consumer staples are likely to see a mixed-bag performance, with some firms likely to witness a slight moderation in sales growth as covid tailwinds subside (GCPL/Dabur India/Emami) and some likely to benefit from the unlocking (HUL/ Britannia/ ITC).”

To be sure, investors would do well to follow management commentary, especially on rural demand trends and input cost inflation. Meanwhile, as mentioned earlier, valuations of most consumer staples companies are not exactly cheap. Against this backdrop, it might be prudent for investors to stay cautious from a near- to medium-term perspective.
Pallavi Pengonda

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