FMCG Q2 Preview | Price hikes to drive revenue growth but volumes to remain under pressure

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Fast moving consumer goods (FMCG) makers are expected to report strong revenue growth in the quarter ended September 2022, thanks to price hikes in the previous two quarters to offset input cost inflation.

For the 19 consumer companies under Motilal Oswal’s coverage, 16.7 percent growth is expected in revenue, 13.6 percent in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and 12.9 percent in net profit.

Kotak Institutional Equities expects 17 percent revenue growth for Hindustan Unilever Ltd (HUL), 15 percent for Britannia, 13 percent for Nestle and 12 percent for ITC’s FMCG business.

“Food and beverages categories should fare better than some home and personal care categories. We expect ITC, HUL, Britannia and Nestle to lead the pack,” Kotak Institutional Equities said.

Margins and volume growth

Revenue will expand, but margins will continue to be under pressure because of high-cost inventory. Analysts expect lower spot prices of raw materials to aid margins from the next quarter onwards.

“The prices of key commodities such as crude and palm oil have eased in the recent weeks, but they are unlikely to benefit margins in Q2FY23 as the decline came in only towards the end of the quarter,” Motilal Oswal said.

The full benefit of lower raw material prices is likely to come about only in H2FY23. Companies’ commentary on raw material prices, rural recovery and outlook for H2FY23, as the festive season kicks in, will be key to watch, Axis Securities said.

Volumes growth in most categories will be dented because of product weight reduction, high consumer inflation and a sustained slowdown in rural demand.

“Rural demand, which is 40-50 percent of industry demand, is reeling under burden of higher agri-input inflation. There are clear signs of downtrading across brands – hyperinflation in day-to-day essentials weighed on consumer disposable income,” Philip Capital said.

In its Q2FY23 update, Marico said its India business will record low single-digit volume growth. Dabur, too, warned of weak demand trends across categories in the quarter gone by.

Kotak Institutional Equities has pegged 4-8.5 percent domestic revenue growth with subdued volumes for Dabur, Godrej Consumer and Colgate.

For Marico, the securities firm expects 1.8 percent year-on-year domestic revenue growth on the back of low single-digit volume growth.

Paints and discretionary category

Asian Paints is expected to lead the paints pack with high double-digit growth. Axis Securities expects Asian Paints to deliver 32 percent year-on-year growth, driven by a combination of 12-13 percent volume growth, price hikes, market share gain, and expansion of the dealer network.

IDBI Capital expects Asian Paints’ revenue to grow 24 percent year-on-year. With prices of key raw materials such as crude and titanium dioxide decreasing by 16-17 percent on a sequential basis, the company’s EBITDA margin is expected to grow 500 basis points YoY to 18 percent. One basis point is one-hundredth  of a percentage point.

When it comes to QSRs (Quick Service Restaurants), Philip Capital expects 12 percent price-led same store sales growth for Jubilant Foodworks on account of 12-14 percent price hikes taken in the past year.

“Westlife Development shall see much better performance (+25 percent) versus Jubilant Foodworks due to higher share of dine-in (as consumers are facing fatigue towards delivery models)” the note added.

For United Spirits, Nuvama Research (earlier known as Edelweiss) expects revenue growth of 13.1 percent YoY while profits and margins will take a hit as higher priced inventory will show up in this quarter.

Meanwhile, United Breweries’ revenue growth is expected to slow sequentially due to the peak summer season in Q1FY23. High barley and glass bottle prices might impact gross margins of the company.

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