Over the last two fiscal years, FMCG companies faced strong headwinds from broad-based, multi-year high input cost inflation. But, reduced promotions, drop in grammage, calibrated price hikes and savings in operating costs contained the impact on operating margins over FY20-22.
While there are signs of correction in the prices of some key commodities from their peak levels, companies are still holding high-priced inventory, at least until 2QFY23. Thus, Nirmal Bang expects sequential gross margin improvement from 3QFY23 onwards as inflation at the basket level comes off.
Over FY22-24E, assuming normalization of input costs and partial reversal of price hikes, the brokerage firm expects material gross margin expansion, bringing it closer to FY20 levels.
"Operating cost savings witnessed over FY20-22 will reverse, largely due to A&SP spending, thus restricting operating margin expansion. But the overall cost structure will remain below FY20 levels due to aggressive cost efficiency initiatives taken over FY20-22, leading to a better EBITDA margin profile," Nirmal Bang said.
Over FY22-24E, the brokerage firm expects robust EBITDA margin expansion for its FMCG coverage universe, driven by strong gross margin expansion on a low base (impacted by extreme broad-based inflation) and better realizations going forward as it doesn’t expect full reversals of the price hikes taken in the last two years.
This will be only partially offset by an increase in operating costs as variable costs will rise with enhanced volume and improvement in the operating environment, said the brokerage firm.
"EBITDA margin should revert to FY20 levels by FY24 for our FMCG coverage universe even while gross margins are still below FY20 levels due to leaner P&L," said Nirmal Bang.
"From our FMCG universe, we expect ITC, Britannia Industries, Marico, Gillette India, Tata Consumer Products and Hindustan Unilever to deliver EBITDA margin expansion in the range of 160-340bps over FY22-24E, higher than other coverage FMCG companies," Nirmal Bang said.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.