FMCG sector Q4 review: Healthy volume, margin growth; can the sector sustain momentum?

Analysts pointed out that companies such as Nestle and Tata Consumer delivered strong performances, while Hindustan Unilever and Dabur fell short of expectations. On the other hand, smaller players like Bajaj Consumer and Jyothy Labs exceeded expectations and demonstrated promising growth.

The numbers

Among the heavyweights, ITC reported a 22.7 per cent year-on-year (YoY) rise in its consolidated net profit to ₹5,225.02 crore for the quarter ended March 2023 (Q4FY23) while Hindustan Unilever (HUL) reported a 12.74 per cent year-on-year (YoY) rise in consolidated net profit at ₹2,601 crore for the March quarter of the financial year 2022-23 (Q4FY23) against a profit of ₹2,307 crore in the same quarter last year.

Nestle India reported a net profit of ₹628 crore in the fourth quarter of CY22 (Q4CY22), up 66 per cent YoY. Dabur India reported a marginal decline of 0.5 per cent in consolidated net profit to ₹292.76 crore for the quarter ended March 2023. This was against a net profit of ₹294.34 crore in the year-ago period.

Britannia reported a 47.5 per cent rise in consolidated net profit to ₹557.60 crore for the quarter ended March 2023. This was against a net profit of ₹377.95 crore in the year-ago period.

Godrej Consumer Products reported a rise of 24.2 per cent in consolidated net profit to ₹452.1 crore, This is against a net profit of ₹363.2 crore in the corresponding quarter last fiscal.

Titan Company reported a rise of 50 per cent in standalone net profit to ₹734 crore for the quarter ended March 2023 against a net profit of ₹491 crore in the year-ago period.

Positive trends

The numbers of most of the companies came on expected lines. As the brokerage firm Motilal Oswal Financial Services observed companies in its coverage universe delivered a cumulative sales growth of 9.8 per cent YoY against the estimates of 8.7 per cent in Q4FY23.

“Volume growth has started to see some recovery during the quarter; however, it continues to remain at lower levels, due to persistent softness in rural India. Out of the 19 companies in our coverage universe, eight companies reported double-digit sales growth, while it remained flat for five companies,” said Motilal Oswal.

“Titan reported healthy sales growth of nearly 33 per cent. Overall sales growth was largely in line (11 out of 19 companies), but there were a few notable misses as well (Jyothy Labs, Page Industries and Procter & Gamble Hygiene & Health Care),” Motilal Oswal said.

Most FMCG firms saw their margins improving in Q4FY23 due to factors including a fall in raw material prices, price hikes of their products and improvement in product mix.

Motilal Oswal pointed out that due to a decline in crude and palm oil prices, Asian Paints, Indigo Paints, Godrej Consumer Products, Pidilite Industries, and Jyothy Labs saw a significant improvement in gross margin. However, due to elevated levels of barley and glass costs, the gross margin of United Breweries contracted further.

“Management commentary from most of the companies suggested that ad spending has returned to normal levels and companies will not shy away from investing in advertising and promotional (A&P) going forward,” Motilal Oswal said.

One of the weak points during the March quarter was a slowdown in rural markets. But Motilal Oswal said management commentary of companies hinted there were signs of improvement with the reversal in the declining volume trend during the quarter.

“This serves as a silver lining for the year, instilling hope for improved conditions and increased consumer activity in rural areas. However, it remains to be seen whether this trend will sustain, as a complete recovery in rural areas is crucial for driving overall growth. Factors such as a normal monsoon and a low base of rural growth could lead to further improvement in the future,” said Motilal Oswal.

The road ahead for the sector

S. K. Hozefa, CEO of Tradeplus Online underscored that two key themes to watch in the FMCG sector are margin expansion and mergers and acquisitions (M&A).

“With declining raw material prices and increasing sales volume, companies have an opportunity to improve profitability. M&A activity is also expected to rise as companies seek growth through acquisitions,” said Hozefa.

Notable developments include Godrej Consumer’s acquisition of Raymond’s consumer business, raising questions about valuation and scalability. Nestle is considering acquiring Ching’s, and the recent Reliance acquisition of 51 per cent stake in Lotus Chocolate Company, adds to the sector’s intrigue.

Hozefa said FMCG valuations currently align with the 10-year average, prompting investors to consider cheaper, outperforming companies like Bajaj Consumer, Jyothy Labs, and Emami.

“The sector is viewed as a defensive investment during uncertain times, but sustained growth relies on income growth among low-income consumers. While there has been some improvement in rural wage growth, it is not substantial enough to boost overall growth. Maintaining profitability amidst economic uncertainties remains a challenge,” Hozefa said.

Anita Gandhi, whole-time director and head of institutional business at Arihant Capital Markets said as commodity inflation gradually subsides, it is anticipated to alleviate financial burdens for rural consumers. This, in turn, is expected to reignite buying activity and potentially drive a surge in volumes.

Gandhi said as pricing pressures on commodities ease, companies are likely to witness improvements in profitability. Furthermore, the ongoing focus on premiumization strategies by most companies is poised to yield positive results.

“With these factors in play, the outlook appears promising. As commodity inflation cools further, it is anticipated that more disposable income will become available to rural consumers, leading to increased purchasing power. Simultaneously, the easing of commodity pricing pressures and the fruition of premiumization endeavours are expected to enhance profitability for industry players,” said Gandhi.

Anil Rego, Founder and Fund Manager at Right Horizons PMS is bullish on the sector over the long term because of rising disposable income due to the structural story intact on India’s multi-decadal growth.

“The improvement in the standard of living, changing preferences, and easier accessibility are all key drivers. The Semi-urban and rural segments were growing at a rapid pace but have remained muted for the past few quarters. Demand recovery is expected in the upcoming quarters which will likely push growth further. The Prices of most commodities moderated, and input commodities such as veg oils, packaging materials and others have corrected from peak levels, so we expect margins to improve further in upcoming quarters,” said Rego.

Sonam Srivastava, Founder of Wright Research is also positive about the FMCG space due to the easing of commodity prices which is expected to spur an improvement in rural demand​.

“The consumption theme will get stronger if the economy remains strong and FMCG will flourish. However, considering the mixed Q4 performance, we can expect the sector to continue working on margin recovery and volume growth, with a particular focus on rural markets,” said Srivastava.

Aamar Deo Singh, Head of Advisory at Angel One said while the FMCG stocks are gaining, the way this sector has rallied, one needs to be cautious at current levels for fresh entry, however, on any meaningful correction, stocks can be looked at from a long-term perspective.

“A SIP approach could also make sense, given the overall consistent growth in the Indian consumption story. There will no doubt be hiccups on the way, but then that’s part and parcel of investing in the markets,” said Singh.

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 03 Jun 2023, 11:55 AM IST