Another quarter, and the same script for consumer companies. The Street is expecting between 8 and 11 percent revenue growth for packaged consumer goods makers in the quarter ended March 2023 on subdued sales by volume as rural demand continues to lag.
“With no clear signs of recovery in rural demand, sales growth in staples would be led by value growth and premiumization, both of which are also tapering down,” analysts at securities firm Motilal Oswal Financial Services wrote in a note.
Business updates of Fast-Moving Consumer Goods (FMCG) companies are a clear indication of the trend. Dabur, to whose sales rural India contributes 47 percent, said the segment has “fallen short of a full recovery”.
Marico’s management says a visible and sustained recovery is expected only in the coming quarters.
That said, analysts believe Hindustan Unilever, Britannia, ITC and Godrej Consumer Products are expected to outperform peers.
Hindustan Unilever’s revenue growth at 15 percent is expected to be driven by its laundry segment. HUL said on Friday that n February, its Surf Excel brand had crossed the $1 billion turnover mark.
Britannia’s solid run is set to continue on the back of demand resilience in the biscuits category. For ITC, analysts at Kotak Institutional Equities are modelling a 15 percent year-on-year increase in volume growth and 17 percent cigarette growth on an Earnings Before Interest and Taxes basis.
Godrej Consumer Products is expected to report good growth on a low base and its entry into low unit packs of hair color cream and premiumization of air freshners.
Volume growth and margins
Sales volume declines may be behind FMCG companies, but projections for growth are not gung-ho. Most companies are expected to post mid single-digit volume growth in Q4, with Kotak pegging the range at 0-6 percent.
In Q4, consumers in rural India remained cautious before buying staples or a discretionary products as has been the case in previous quarters, analysts said.
To bring back volume growth, advertising and promotional spending has been ramped up by most consumer companies and this, in turn, will affect operating margins.
Companies did not have the liberty to increase ad spending over the past few quarters because high raw material inflation was pinching their gross margins. With palm oil prices and Brent crude prices having dipped in Q4, companies took a step ahead in this direction.
Also Read: MC Opinion | FMCG earnings updates signal healthier margins, but sales growth a mixed bag
There is a huge divergence in EBITDA, or Earnings Before Interest, Tax, Depreciation and Amortization margin growth across companies, Motilal Oswal Financial Services said.
Nine of nineteen stocks under its coverage are likely to report flat or lower EBITDA margins year-on-year. ITC, Asian Paints, Britannia and Nestle are likely to report margin expansion of 180 basis points-250 basis points Year-on-Year (YoY). One basis point is one-hundredth of a percentage point.
Discretionary
Elara Securities’ checks indicate muted demand for paint companies post January and a slowdown in the Business-to-Business (B2B) business vertical.
“Industrial paints, too, are likely to be muted due to flat auto OEM production,” wrote Elara analysts. Asian Paints is expected to report 9 percent YoY sales growth with 6 percent domestic decorative volume growth.
In the Quick Service Restaurant (QSR) space, revenue is expected to have declined sequentially since the previous quarter was a festival season. Prices of dairy and flour, two key raw materials for fast food chains, remained elevated in the quarter, which will cause margins to contract further. Jubilant Foodworks’ Same Store Sales may have contracted 2.5 percent.
Also Read: This fund manager is overweight on autos with EV capabilities, and underweight on FMCG
The one company where analysts are projecting strong double-digit volume growth is Varun Beverages. Kotak Institutional Equities expects 27 percent revenue growth and 20.3 percent volume growth for the company, once again propelled by the energy drink Sting.
In the alcobev segment, United Spirits, Radico Khaitan and United Breweries are seen reporting average growth, but elevated ENA (extra neutral alcohol) prices, which make up 65-70 percent of raw material costs, will adversely affect margins in the quarter.
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