Fast moving consumer goods (FMCG) companies are expected to report moderate revenue growth in the quarter ended June 30, 2023. This is due in part to companies’ cutting prices and in part, to lower rural demand.
Nuvama Wealth expects a 5 percent growth in revenue and 15 percent in Earnings Before Interest, Tax, Depreciation and Amortization (EBIDTA) for companies under its coverage.
Kotak Institutional Equities expects a 12 percent revenue growth for ITC, 10.2 percent for Britannia, 7 percent for Dabur and 9.1 percent for Hindustan Unilever (HUL). “We expect Nestle to lead the pack on revenue growth and Britannia or Godrej Consumer Products Ltd. on earnings growth (off a low base),” Kotak Institutional Equities says. Analysts expect Marico Ltd. to have a weaker growth.
In terms of performance, Britannia, Nestle, and Godrej Consumer Products Ltd. are expected to do well, while Dabur, ITC, HUL and Bajaj Consumer are predicted to be in the middle tier, Nuvama Research says. Emami and Marico will likely struggle in the first quarter of FY24, the firm adds.
Nuvama’s report says Britannia’s rural performance is expected to help despite an overall weakness for the company, as biscuits have remained more resilient than other segments. For Godrej Consumer Products Ltd. the India business (organic business) is expected to grow by 9.5 percent with a volume growth of 11 percent year-on-year due to negative pricing in soaps.
Nestle is expected to perform better due to strong demand for milk and Infant nutrition. The company’s rural demand is also strong due to expansion in distribution and resilience in the noodles category.
ITC is expected to have a consolidated revenue dip by 4.3 percent year-on-year due to a very high base in wheat in their agriculture business.
Hindustan Unilever’s ice-cream portfolio is expected to see the impact of unseasonal rains and weak summers. The tea business is expected to see a fall. Milk inflation also remains a challenge for the company.
Marico, in its quarterly update of Q1 FY24, says that anticipated pickup in rural demand remained elusive, dampening overall growth prospects. The company is expected to report a revenue dip of 2.3 percent year-on-year on the back of sharp price cuts in Saffola edible oil, Nuvama notes.
Margins and Volume growth
Revenues are expected to be moderate as companies pass on the benefit of lower raw material costs to customers, but margins are set to expand as price cuts in select segments will likely increase prices.
“Easing inflationary pressures would drive gross margin improvement, but ad spends are likely to go up. El Nino is a key risk for the entire sector, but government stimulus programmes in an election year are likely to mitigate the former’s potential fallout,” Nuvama Research says.
Most companies will report healthy EBITDA growth led by gross margin expansion (off a low base). The increase in gross margins is primarily caused by decreasing raw material costs.
The companies under Kotak Institutional Equities are expected to report a 16.9 percent EBIDTA growth. After reaching their highest point in the first half of FY23, the prices of raw materials have been gradually decreasing, although they are still higher than they were before the COVID pandemic.
“The FMCG sector seems well poised in 1HFY24 with a raw material cost tailwind. However, in 2HFY24 we expect revenue growth to be moderate as pricing benefits should fade and growth would have to be volume-led.” said BNP Paribas.
Discretionary
The larger players in the paints industry are expected to experience moderate volume growth, although on a very high base. Indigo Paints is expected to outperform with twice the industry's growth rate. Most paints and adhesives companies are likely to see strong margin expansion, as per Nuvama Research.
The Health & Immunity sector is expected to bounce back and show decent growth after a few quarters of disappointing performances. However, the summer portfolio, which includes beverages, cooling hair oils, ice cream, and talcum powder, is likely to be weak due to unexpected rainfall, the research firm notes.
Demand for Quick Service Restaurants (QSR) continues to be soft but steady due to inflationary pressures. In this segment, Kotak Institutional Equities expects a 7 percent revenue growth led by 4 percent same store sales decline for Jubilant FoodWorks which would imply a marginal deceleration in the growth trajectory.
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