The sales volumes of consumer goods companies for the third quarter of financial year 2023 are likely to be impacted due to a persistent downturn in rural demand. However, an uptick in the festive season, sustained demand for premium categories, and stable demand in urban markets will lead to sequential improvements in volume for some companies, said brokerage firm Sharekhan in its results preview report.
The brokerage expects the volume growth trajectory to be between 0 and 5 percent for most consumer goods companies under its coverage universe. It also expects revenue to grow by 8 percent YoY in Q3 FY2023 for the companies under its coverage (excluding ITC, which is expected to grow by 11 percent).
Sharekhan anticipates food companies such as Britannia Industries and Nestle India will lead the pack with high double-digit revenue growth, followed by HUL. In addition, other companies, including Colgate Palmolive India, Dabur India, Emami, and Marico, are expected to post low-to-mid single-digit revenue growth during the quarter.
The drop in key input prices (including palm oil, titanium dioxide, and copra) and a flat to a marginal increase in other key input prices (except for wheat and milk) will lead to YoY improvement in gross margins.
However, higher marketing and promotional spending will result in OPM (operating profit margin) staying lower on a YoY basis for most companies under its coverage universe, it said.
Overall, for Sharekhan’s consumer universe, OPM is expected to decrease by 32 bps YoY, while ITC’s OPM is expected to increase by 250 bps YoY due to a better mix (contribution of the agribusiness spiked in Q3FY2022).
Consumer goods companies expect rural demand to recover from Q4 FY2023 with the easing of consumer inflation, better rabi production, and the likely offering of stimulus by the government in the upcoming Budget.
Volume growth will recover gradually, but consistency will likely improve in the coming quarters. Further, corrections in commodity prices (key input prices) would help companies take relevant pricing and promotional actions to achieve better sales volumes in the coming quarters, said the brokerage.
OPM is expected to sequentially improve in Q3 FY2023. Further, if crude oil and other input prices remain stable in the coming months, OPM is expected to improve YoY beginning in Q4 of FY2023, it added.
Overall, Sharekhan expects FY2024 to be one of the good years for consumer goods companies after three years of uncertainties led by the pandemic, sharp global commodity inflation due to the Russia-Ukraine war, and the rural economy grappling with higher consumer inflation.
On the other hand, medium- to long-term growth prospects for consumer goods companies are intact, with a large shift happening towards branded products, premiumization gaining momentum, the emergence of new platforms such as e-commerce/D2C providing more visibility to the products, and the emergence of new categories offering opportunities for companies to expand their portfolios, Sharekhan pointed out.
Sharekhan prefers Nestle India, Hindustan Unilever, and Britannia Industries in the large-cap space as they have a strong brand portfolio that is steadily increasing share in the domestic market. The brokerage noted that HUL and Nestle India have recently lagged the broader indices and present an excellent opportunity to enter the quality FMCG play.
In the mid- to large-cap space, the brokerage's top choice is Marico, which is witnessing a favourable input cost environment with a correction in the prices of copra and other edible oils in the past two quarters.
The brokerage said it also likes Dabur India as it continues to gain market share in some key categories despite the demand slowdown in the domestic market. Once the rural economy is back on track, Dabur will be one of the quickest to see a revival in performance on account of its strong presence in the rural market.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.