A triple whammy of sticky food inflation, uneven rainfall in the north and softer demand in rural markets could mean fast-moving consumer goods (FMCG) companies reporting a drop-off in revenue growth in the July-September quarter, according to analysts. FMCG companies had largely reported double-digit revenue growth in the same quarter last fiscal due to the price hikes taken on back of raw material inflation.
Now, the FMCG universe is set to report a revenue growth of 6.6 percent for Q2FY24 on a year-on-year basis. Earnings before interest, taxes, depreciation and amortisation or EBITDA and net profit are set to grow 14.9 percent and 12.5 percent, respectively, Shirish Pardeshi and Soham Samantha from Centrum Institutional Research said in a note. But brokerage firm Prabhudas Lilladher expects margins for FMCG companies in Q2FY24 to improve on a quarter-on-quarter basis as well as on a year-on-year basis.
Weak rural
Underlying rural demand remains subdued in the July-September quarter as a result of wide regional variations in the annual monsoon rainfall and rising prices, which ate into demand. “Rural demand recovery has been delayed due to high inflation, flash floods and patchy monsoons in several parts of the country,” said Prabhudas Lilladher in a report dated October 7.
“Our on-ground checks indicate a spiralling food inflation and consumers bought only necessity products or shifted to cheaper options of local players, an impact of which was seen higher in rural owing to weaker rural demand in the north and central region,” said Pardeshi and Samantha of Centrum.
How the companies could fareHindustan Unilever is expected to post a revenue growth of 3.2 percent on an annualised basis in the second quarter, said Kotak Institutional Equities in an October 3 report. “Hindustan Unilever’s price cuts would impact topline growth and late festive season would impact volume growth,” the report said.
ITC is expected to deliver a 5.5 percent on-year revenue growth in Q2FY24, as per Centrum Broking. The brokerage firm expects the FMCG segment to continue its growth momentum with around 14.5 percent revenue growth as out-of-home consumption was driving demand for packaged and ready-to-eat segments. On the other hand, the company’s cigarette portfolio is estimated to deliver 8.9 percent revenue growth on a yearly basis.
Nestle is well-placed to outperform the FMCG pack with a year-on-year revenue growth of 11.5 percent, said Kotak Institutional Equities. The brokerage expects gross margins for Nestle to expand by 50 basis points on a sequential basis and 250 basis points on an annual basis. This is because price hikes and deflation in edible oils, wheat and packaging would partly offset inflation in coffee and dairy prices.
How’s discretionary looking?
A delayed festive season is what’s holding back discretionary spending, especially jewellery and paints, analysts say. “Jewellery saw tepid demand in the quarter led by a delay in the marriage season in both north and south India, late Diwali and ‘Adhikmas’ as consumers delayed their jewellery shopping,” said Prabhudas Lilladher.
Adhikmas is considered inauspicious for ceremonies like marriage, housewarming, purchasing new items, etc.
Titan is expected to report a revenue growth of around 20 percent over the previous year in the July-September quarter, said the company in its quarterly update.
Centrum Broking expects Asian Paints to report 9.5 percent growth in net sales, driven by 7 percent growth in volumes in the domestic decorative paints segment aided by market share gains and a premiumisation trend.
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