FMCG Q2 results review: Sluggish volume growth a worry, does that make the sector an avoid?

Experts believe the sector’s future success will hinge on the revival of rural demand, innovation, and societal segmentation. The affluent class is expected to increasingly favour premium products, while the non-affluent section will likely continue to prioritise value-for-money options.

Year-to-date stock performance of Nifty FMCG stocks

A majority of components of the Nifty FMCG index have gained healthy gains in the current year so far. Stocks such as Varun Beverages and Colgate Palmolive India have gained about 39 per cent and 36 per cent, respectively, in the current calendar year so far (as of November 1).

On the flip side, Dabur India (down 7.90 per cent), United Breweries (down 5.5 per cent) and HUL (down 3.5 per cent) are the three components of the Nifty FMCG index that have performed poorly this year so far.

Nifty FMCG index is up nearly 16 per cent in the year so far, outperforming the benchmark Nifty 50 which has gained 5 per cent.

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September quarter earnings of major FMCG players

Hindustan Unilever (HUL): HUL reported a 4 per cent year-on-year rise (YoY) in its standalone net profit for Q2FY24 at ₹2,717 crore. The total revenue from operations increased by 3.6 per cent to ₹15,276 crore from ₹14,751 crore YoY. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin for the September quarter, came in at 24.6 per cent, up by 130 basis points on year.

ITC: ITC’s Q2 standalone net profit rose 10.3 per cent YoY to ₹4,927 crore. Revenue from operations moved up by 2.6 per cent to ₹16,550 crore. EBITDA came in at ₹6,041.5 crore, up 3 per cent against ₹5,864 crore in the year-ago period.

Nestle: Nestle India reported a net profit of ₹908 crore in the September quarter, up 37.27 per cent YoY. The net profit for the quarter includes a one-time gain of ₹106.4 crore. Revenue increased 9.5 per cent to ₹5,036.8 crore from ₹4,601.8 crore in the year-ago period.

Marico: Marico reported a consolidated net profit of ₹360 crore for Q2FY24, marking a growth of 17.3 per cent YoY. Revenue from operations dipped marginally by 0.8 per cent YoY, coming at ₹2,476 crore. EBITDA came in at ₹497 crore in Q2FY24, higher by 14.8 per cent from ₹433 crore in Q2FY23.

Britannia: Britannia reported a rise of 19 per cent in consolidated net profit at ₹587 crore. Revenue from operations rose 1.2 per cent YoY to ₹4,433 crore.

The road ahead

The September quarter earnings of major FMCG players show that they are facing pressure on the volume front. Even though margins have improved, marketing spending has also increased.

“The September quarter highlight that emanates out of the Q2 results is that the volume growth is still sluggish, especially in the rural areas. With improvements on the cost side, the margins have improved a bit but balanced out by enhanced marketing spending,” said Bhavesh Shah, Head and Managing Director, Investment Banking at Equirus.

Going forward, Shah believes the societal segmentation will play out considerably in the FMCG space.

“The affluent segment will continue to try new products and there will be a shift towards premiumisation. Cost efficiencies and value-for-money propositions will rule in the non-affluent segment. Innovation is going to be the key across all segments to differentiate and win,” said Shah.

However, Vincent KA, a research analyst at Geojit Financial Services finds the results are better than expected overall, apart from some setbacks in the lack of a full revamp in revenue growth.

Vincent said the industry’s revenue growth fell slightly short of the estimate, primarily due to a lower-than-expected increase in volume. Demand has not completely recovered due to muted rural growth on account of erratic and deficit monsoons and volatile food inflation. However, there has been a positive trend in both operational and PAT margins, attributed to a decline in international-led inflation, such as in crude oil and food prices.

Consequently, this has led to an upgrade in earnings growth, with expectations of a demand upswing in the future, driven by upcoming festivals and the minimal threat of El Nino, said Vincent.

He added that cautiousness persists due to low reservoir levels, which might affect rural demand and the cost structure of FMCG companies in Q3 and Q4. This may confuse in the short term. Nevertheless, an upgrade in the forecast and a correction in valuation is encouraging for medium- to long-term stable performance, Vincent said.

What should investors do?

Abhishek Jain, Head of Research at Arihant Capital observed that the FMCG sector is currently navigating through some noteworthy challenges, particularly with the increasing costs of raw materials. Some companies are also facing growth hurdles at this juncture. However, it’s essential to view this sector as a defensive one known for its resilience.

“Given the recent Q2 numbers and the sector’s defensive nature, it could be an opportune moment to consider FMCG stocks, especially during market declines. For investors with a one to two-year investment horizon, this sector may offer stability and potential growth, as it traditionally performs well in uncertain economic climates. While challenges exist, a cautious yet optimistic approach to investing in FMCG could benefit those with longer-term objectives,” said Jain.

T Manish, a research analyst at SAMCO Securities pointed out that a majority of the companies in the FMCG sector are facing the heat of inflated vegetable and food prices. Weak monsoon has resulted in sluggish rural market demand. Rising competition from regional players in the unorganised sector, offering smaller units at lower prices, has exerted pressure on the top and bottom lines of several FMCG companies in Q2FY24.

Manish further said that given the ongoing market weaknesses due to macroeconomic challenges, coupled with the possibility of election-related volatility, it is likely that the markets may experience a correction. However, the increased government spending ahead of elections could boost the earnings of FMCG companies.

“During times of such market turbulence and uncertainty, defensive stocks provide stability and protection to the entire portfolio. So, investors can add stocks from this sector with a time horizon of at least one year from now,” said Manish.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 02 Nov 2023, 01:34 PM IST