FMCG companies are likely to report muted earnings for the June quarter of FY23 (Q1FY23) as their performance will be impacted by rising inflation and demand slowdown.
According to a report by ICICI Securities, volume growth is likely to remain muted in the context of lower sales in the base quarter, which was impacted by the second wave of pandemic. The brokerage said that its FMCG universe is expected to post 14.8 percent revenue growth driven by strong growth in ITC and HUL. It forecasts a 14.4 percent net profit growth for its FMCG coverage universe.
Though it believes the current quarter would continue to see gross margin contraction, the fall in commodity prices at the fag end of the quarter would release pressure on FMCG companies to take further price hikes, going forward.
"FMCG companies are expected to post price led revenue growth given most companies have taken 10-15 percent price hikes in the last one year to pass on sharp inflation in palm oil, crude derivatives and agri commodities," it said in its report. FMCG firms have slowed down new product launches in the last few quarters, given the pressure on gross margins leading to a reduction in ad spends, ICICI pointed out.
ICICI expects 4 percent volume growth in HUL on account of lower sales in the base quarter specifically in discretionary categories like cosmetics and skin care. Moreover, strong summer demand for ice-creams after two years of disruption would have aided growth in the foods segment, it added.
ITC is likely to post the strongest revenue growth within its coverage, noted ICICI led by a full recovery in cigarette volumes, robust growth in paperboard business, recovery in stationary business and price hikes taken in the FMCG business to pass on raw material inflation.
Meanwhile, despite a high base quarter sales, Dabur is expected to post strong 8 percent sales growth led by 4-5 percent volume growth in India business, it noted, adding that Tata Consumer Products (TCPL) is likely to witness 5 percent volume growth in India beverage business given tea prices remained benign in the last one year.
Further, as per the brokerage, Nestle may see price-led sales growth in Q1 with Maggi noodles continuing growth momentum and growth in milk products remains a drag. With elevated edible oil prices in most part of the quarter and a high base of last year and Marico is likely to witness volume de-growth in the Saffola brand.
VST Industries is also likely to witness a full recovery in cigarette volumes to pre-Covid levels.
Commodity price hikes have been the main reason for the denting in consumer demand for consumer firms. However, the brokerage stated that most commodity prices seem to have peaked out in June 2022 and started cooling off considerably. Palm oil prices have dropped 30 percent from the peak but average palm oil prices in Q1FY23 were up 54 percent against the average of Q1FY22, it highlighted. Similarly, even though crude oil prices have started cooling off from the peak but still remain above US$100/barrel, it said.
The government has also proactively restricted exports of wheat and sugar, which has cooled down agri commodity prices as well, ICICI pointed out.
ICICI estimates 20-200 bps operating margin contraction for most of its coverage companies. However, with the dip in tea and copra prices in the last few quarters, Marico and Tata Consumer are likely to see 80-140 bps operating margin expansion, it noted.
The Nifty FMCG has outperformed benchmarks in the last 1 year, rising 13 percent in this time against a 3 percent rise in benchmark Nifty50. The FMCG index has added around 4 percent in the June quarter and 9 percent in 2022 so far. Among stocks, Varun Beverages and ITC have been the top performed in 2022 surging 44 percent and 35 percent, respectively. Meanwhile, HUL, Colgate and Britannia advanced around 5 percent each. However, Radico Khaitan was the worst performer, down 26 percent in this time while Emami and Godrej Consumer also fell in double digits.
