FMCG makers expect margins improvement and comeback of rural sales from Q3 as inflation eases
The FMCG industry expects an improvement in its margins and hopes to make a comeback from the rural market from the third quarter, though it witnessed pressure on volume in the September quarter as high inflation persists.
Makers of fast moving consumer goods (FMCG) are now seeing green shoots of recovery with the onset of the festive season and a good monsoon and crop harvest in the rural areas.
In the July-September quarter, listed FMCG companies, including HUL, ITC, Dabur, Nestle, Tata Consumer, Britannia and Marico, reported pressure on their margins on similar lines as the preceding quarter and said the demand environment remained challenging with inflation impacting consumption.
However, as the commodity prices of palm, khopra etc have softened, FMCG companies expect a sequential improvement in their gross margins and mid-single-digit volume growth.
In the September quarter, FMCG companies reported a price-led growth in their top line. While in some segments, FMCG makers such as Britannia, Dabur and Nestle have reported volume growth as well.
Home-grown maker Marico, in its latest quarter earnings, said: āAs retail inflation held firm, the FMCG sector witnessed a volume decline for the fourth quarter in a row, with growth led by pricing. Demand sentiment was largely on similar lines as the preceding quarter and improved slightly only in the last month of the quarter.ā
However, the company which owns brands such as Parachute, Saffola and Hair & Care, said gross margin should improve sequentially from Q3 as copra remains in the soft zone
āWe will closely watch rural growth and are hopeful of a recovery. We expect to deliver mid-single digit volume growth in H2,ā it said.
Maricoās consolidated net profit was down 3 per cent to Rs 307 crore in the July-September quarter and its revenue from operations was up 3.18 per cent at Rs 2,496 crore.
While Britannia, which recorded its āhighest quarterly revenueā in Q2, also said on the cost & profitability front, commodity inflation remained on the boil on the back of rising inflation in flour and milk products.
The company, which has popular brands such as Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold, reported āmid-single-digit volume growthā. Its net profit was up 28.5 per cent to Rs 490.58 crore and its total revenue from operations climbed 21.40 per cent to Rs 4,379.61 crore for the second quarter that ended September 30, 2022.
Another home-grown firm Dabur said the environment remains āchallenging, marked by unprecedented inflationā and had a consequential impact on consumption. It had reported a decline of 2.85 per cent in net profit to Rs 490.86 crore and revenue from operations/sales 6 per cent higher at Rs 2,986.5 crore.
However, the countryās fourth-largest FMCG company is also seeing āgreen shoots of recoveryā with the onset of the festive season.
āThe impact of inflationary pressures was more pronounced in the rural markets with demand growth in hinterland lagging urban markets for the first time in five quarters. However, we are hopeful of rural demand reporting a smart recovery in the coming quarters,ā said Dabur India CEO Mohit Malhotra.
Leading FMCG firm HUL also said the demand environment remained challenging with inflation impacting consumption.
āHowever, with softening in some commodities and monetary/fiscal measures taken by the government, we are cautiously optimistic in the near-term,ā said HUL CEO and Managing Director Sanjiv Mehta, adding, he āremains confident of the medium to long term potential of Indian FMCG sectorā.
Helped by volume growth and market gains, HULās net profit was up 22 per cent to Rs 2,670 crore in Q2 and its total income increased to Rs 15,253 crore.
Multi-conglomerate ITCās FMCG revenue was also up 21 per cent to Rs 4,894.26 crore in Q2/FY23. The company, which has brands such as Aashirvaad, Sunfeast, Fiama and Yippee, anticipate āmoderation in inflation going forwardā.
āNormal monsoons in most parts of the country and proactive interventions by the government and RBI augur well for sustained recovery and a pick-up in consumption expenditure in the second half of the year,ā it said.
Nestle, which operates with brands as Maggi, Kit-kat and Nescafe, witnessed the highest sales growth during a quarter in the last five years. Its profit in the September quarter was up 8.25 per cent to Rs 668.34 crore and sales at Rs 4,591 crore, up 18.24 per cent.
āWe are witnessing early signs of stability in prices of a few commodities such as edible oils and packaging materials. However, fresh milk, fuels, grains and green coffee costs are expected to remain firm with the continued increase in demand and volatility,ā it said.
Tata Consumer Products Ltd also said it faced inflationary pressures, weakness of currency and some lag in pricing in international markets during the September quarter.
The Tata group FMCG armsā net profit was up 36.2 per cent at Rs 389.43 crore and revenue from operations climbed 10.87 per cent to Rs 3,363.05 crore in the second quarter that ended September 30, 2022, led by strong growth in the domestic market.
Despite all this, a depreciating Indian rupee against the US dollar is also a concern for the FMCG makers impacting their imports