After delivering double-digit returns in the previous quarter, shares of major FMCG companies began October on a sour note after companies released their second-quarter updates. Leading FMCG players stated in their quarterly updates that the second quarter saw a continuation of soft demand across all categories in the industry due to the ongoing effects of inflation.
Dabur warned that rising inflation during the second quarter of FY23 could lower its operating margin by around 150-200 bps YoY, and it expects revenue to grow in the mid-single digits. Another FMCG major, Marico, said that its business posted low single-digit volume growth in the second quarter of FY23.
In its quarterly update, Godrej Consumer Products stated that the FMCG industry remained soft during the quarter. On the profitability front, it anticipates a mid-teen decline in EBITDA due to high-cost materials, significant upfront marketing investments to drive category development, and a weak performance in Indonesia. However with significant corrections in commodities such as palm oil derivatives and crude oil, it expects gross margin expansion and upfront marketing investments in the coming quarters.
When the conflict between Russia and Ukraine erupted, the price of palm oil skyrocketed, which had a negative impact on FMCG companies' profit margins in the previous two quarters. Companies have implemented several price increases in 2022 in order to protect their margins.
However, easing supply chain disruptions and increasing supplies from Malaysia, the world's second-largest producer of palm oil, as well as lockdowns in China, have all contributed to a drop in the price of palm oil.
HUL has lowered the prices of its products sold under the well-known soap brands Lifebuoy and Lux by 5 to 11% in the western region. While Godrej Consumer Products, the company that owns the Godrej No. 1 soap brand, has also lowered soap prices by 13 to 15%, PTI reported.
Meanwhile, FMCG sales fell by 14.3 in rural India while urban areas saw moderate growth of 1.1% as compared to August, Business Standard reported, quoting Bizom data. Overall FMCG sales fell by 9.6 per cent in September as compared to August. Rural sales account for 65–70 per cent of FMCG sales, according to Bizom.
Bizom said that rural sales were affected owing to excessive rain in some areas and weak precipitation in others, thereby hitting farm yields and household incomes.
In August, both rural and urban markets witnessed growth. Rural areas grew 6.7 per cent and urban ones 5.5 per cent on a month-on-month basis, which sent overall sales up 6.3 per cent.
On a year-on-year basis, FMCG sales were up 8.1 percent in September, while for the July-September quarter, the increase was 12.3 percent.
The Nifty FMCG index fell 4.1%, or 1,895 points, from its recent 52-week high of 45,080 points. The index has corrected by nearly 2.46% in the last week alone. Varun Beverages and Godrej Consumer Products were the biggest index losers last week, falling 6.5% each.
Other FMCG majors like HUL, Marico, Colgate-Palmolive, Tata Consumer Products, Nestle and Britannia Industries saw declines of between 1.5% and 4.5% during the same time period.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
