Will the FMCG industry recover in the upcoming quarters in light of inflation and shrinking demand?

The FMCG industry continues to be pressured by rising input cost prices and a decline in sales from rural markets. Leading FMCG players reported a drop in operating margins for the September quarter, along similar lines to the prior quarter.

Earlier in the second week of October, leading FMCG players stated in their quarterly updates that the second quarter would see a continuation of soft demand across all categories in the industry due to the ongoing effects of inflation.

In the September quarter, FMCG companies reported price-led growth in their top line. While in some segments, Britannia, Dabur, and Nestle have reported volume growth. However, overall volumes remained in the single digits during the quarter.

FMCG major Britannia reported its highest quarterly revenue of ₹4,338 crore in Q2, up 22% YoY, primarily led by a cumulative price growth of 18% and volume growth of 5%. The management states that the company’s market share gains are driven by its strong distribution expansion in direct channels, which, coupled with rural distribution, contributed to the growth.

The company's gross margins came in at 38.3%, up 180 (bps) YoY, despite raw material inflation of over 3% in Q2 FY23, comprising wheat (up 25%), fuel (up 40%), and palm oil (up 10%). While EBITDA margins were 16.4%, they were up 70 basis points year over year due to a 7% price increase ahead of the market and cost-cutting measures, Axis Securities stated in its result update report.

Britannia posted a 28.4% YoY jump in its consolidated net profit at ₹493 crore for the September ending quarter. 

Another FMCG player, HUL, reported a 16% YoY rise in sales to ₹14,751 crore for the September quarter, mainly driven by price hikes, market share gains, and strong double-digit growth in home care and the BPC portfolio. while volume growth was in the single digits (4%).

The company’s gross margins declined by 588 basis points to 44.9%, largely owing to high-cost inventory and continued volatility in key raw material prices (net material inflation was 22% YoY in Q2 FY23).

On a sequential basis, HUL expects RM inflation to come down marginally as it has witnessed a sharp fall in palm oil prices. However, volatility in other key raw material prices, coupled with rupee depreciation, will be a key thing to watch out for. Adjusted PAT came in at ₹2,379 crore, up 9% YoY, according to Axis Securities.

In addition, Dabur reported a 2.85% fall in its consolidated net profit to ₹490.86 crore for the September-ending quarter as high commodity prices weighed on margins. The company posted a net profit of ₹505.31 crore in the July-September quarter a year ago.

Meanwhile, Godrej Consumer Products reported a 25.06% drop in consolidated net profit for the second quarter ended September, to ₹358.86 crore, compared to ₹478.89 crore in the same quarter last fiscal. GCPL delivered price-led growth in Q2 FY23 (+7% YoY) with a 5% decline in India volumes.

The company's total expenses were up 14.41% to ₹2,951.38 crore in the September quarter compared to ₹2,579.45 crore in Q2 FY22. The EBITDA margin of the company declined by 454 bps YoY and 11 bps QoQ due to inflation and an increase in marketing spending.

Volume growth slowed

The country's FMCG industry continued to witness a consumption slowdown in the September quarter, with rural markets registering a higher decline in volumes compared to the three months that ended in June, PTI reported, quoting data from NielsenIQ.

The consumers continued to prefer purchasing smaller packets amid companies hiking prices in response to broader inflationary pressures.

The FMCG industry witnessed an overall volume decline of 0.9 per cent in the September quarter in comparison to the preceding three months. This was the fourth consecutive quarter with negative volume growth for the industry and is "attributed to the double-digit price growth for the past six consecutive quarters," according to data analytics firm NielsenIQ.

The report said that the rural markets recorded a volume decline of 3.6 per cent in the September quarter in comparison to a decline of 2.4 per cent in the June quarter. while at the same time urban markets recorded a 1.2 per cent increase in volumes.

During the September quarter, volume degrowth at traditional trade channels such as Kirana and neighbourhood shops deepened by 2 per cent compared to the June quarter, it said.

Modern trade channels such as hypermarkets, supermarkets, and malls "remain resilient with double-digit value (22.2 per cent) as well as volume (11 per cent)," the report noted.

Small manufacturers and the top 400 FMCG players are driving consumption with positive volume growth of 0.5 per cent.

"They are also gaining both value and volume share in the last 2-3 quarters when looked at sequentially," it added.

FMCG volumes pick up 

As commodity prices start to fall and a good monsoon in the rural areas, FMCG players anticipate a sequential improvement in their gross margins and an increase in volumes in the upcoming quarters.

HUL CEO and Managing Director Sanjiv Mehta said "the demand environment remains challenging with inflation impacting consumption". "However, with softening in some commodities and monetary/ fiscal measures taken by the government, we are cautiously optimistic in the near term. In this scenario, we will manage our business with agility and continue to grow our consumer franchise whilst maintaining our margins in a healthy range."

Dabur India CEO Mohit Malhotra said: "While the challenging economic environment continued to be a concern and impacted the purchasing power, we are seeing green shoots of recovery with the onset of the festive season", PTI reported.

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