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FMCG Q3 Preview | Rural market slowdown may dent volume growth

Price increases may contribute to top-line growth but may not be enough to stem the contraction in operating margins

Mumbai / January 13, 2022 / 12:33 PM IST

Fast-moving consumer goods companies are likely to report revenue growth of 11.3 percent on-year in the quarter ended December, while net profit may rise 8.2 percent after a slowdown in the rural market and price hikes took their toll, according to an average of estimates by four brokerages polled by Moneycontrol.

“A large portion of top-line growth is likely to be contributed by price hikes undertaken by most companies within our coverage, given the steep inflation in input costs,” brokerage firm Motilal Oswal Financial Services said in a note.

Activity in the rural market, which accounts for 40-50 percent of sectoral demand, declined due to high inflation hurting consumer pockets, a cut in product weight, an uneven monsoon, and a delay in the onset of winter.

“We note signs of weakness in rural demand trends and expect the discretionary pack to outperform staples on underlying two-year revenue CAGR,” brokerage firm Kotak Institutional Equities said in a note.

While low-ticket, in-home consumption and health products may have suffered due to weak consumer sentiment, strong growth is expected in discretionary products, driven by the urban market. Growth in the urban market is likely to outpace the rural market as the easing of Covid-19 restrictions and the festive season boosted consumer spending.

Operating margin impact

Companies that increased prices because of a significant rise in raw material costs over the past year are likely to take a hit on sales volume growth, analysts said. However, the price hikes may not be enough to halt a further contraction in operating margins of FMCG companies in the reporting quarter.

Kotak expects a 50 basis point on-year contraction in operating margins of consumer staple companies in the quarter ended December due to the surge in raw material costs. Sequentially, though, companies may see some relief as several global soft commodity prices eased in the December quarter.

Hindustan Unilever may report a 10 percent growth in revenue for the quarter with underlying volumes growing about 1 percent on-year. Edelweiss Securities said HUL may be one of the few companies to report on-year expansion in margins.

ITC is expected to report a top line growth of 11 percent with cigarette sales volumes expected to rise over 6 percent on-year. ITC’s non-cigarette FMCG sales may increase 12 percent, according to Kotak.

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Chiranjivi Chakraborty
first published: Jan 13, 2022 12:33 pm