The Fast-Moving Consumer Goods (FMCG) sector witnessed a mixed performance in Q1FY23 with growth in topline between higher single-digit levels to mid-double digit levels. The topline growth was led by price growth, but the volume growth for FMCG companies continued to be a matter of concern as rural demand continues to be subdued. Further, the inflationary pressures on the raw materials continue to impact the margins of the FMCG companies. Although the companies have started noticing some cooling off in the raw materials prices by the end of Q1FY23, the commodity prices remain higher. Hence the margin pressure on the FMCG companies is expected to stay for a little longer. Therefore, in this article, we will discuss the near-term prospects for FMCG companies amid higher inflationary pressure on a YoY basis and rural slowdown.
Before talking about the near-term prospects of FMCG companies, let’s check how top FMCG companies performed in the first quarter of FY23:Company
Source: Compan’s Quarterly Reports
Note: For ITC, Only the FMCG-Others segment has been considered, and hence Segment EBITDA Margin is calculated. Net Profit has also not been considered as ITC business includes several businesses.
All FMCG companies had reported a healthy topline growth on the back of price hikes, but the volume growth remains subdued for almost all the companies. HUL, ITC, and Nestle India were the top performers in terms of revenue growth performance on a YoY basis. HUL's performance was aided by strong performance in the Home Care and Beauty & Personal Care segment, which grew in double-digits. In contrast, ITC revenue grew due to strong growth in Discretionary/Out-of-Home (OOH) categories and continued resilient performance of staples & convenience foods. Similarly, Nestle India's revenue growth of over 16% was due to broad-based growth in the domestic business, primarily driven by pricing and volume growth led by increasing OOH consumption. On a YoY basis, Marico, Godrej Consumer, and Dabur India reported lower sales growth comparatively, wherein Marico's revenue grew by just 1.3% YoY due to the lower performance of India's business, specifically edible oils.
Earnings before Interest, Taxes, Depreciation & Amortisation (EBITDA) for most of the FMCG companies have been contracted except Marico, which has recorded an expansion of EBITDA margin by 160 bps YoY and 460 bps QoQ. The contraction in the EBITDA margin is mainly because of inflation in the key raw materials like brent crude, caustic soda, polyethylene, Palm Fatty Acid Distillate (PFAD), Barley, etc.
Industry Headwinds:Subdued Volume Growth:
Note: Volume growth refers to the growth in the physical volume of sales. Value Growth can be referred to as the growth in the sales/
The FMCG Industry has been witnessing a consistent downward trend in volume growth from April-June 2021 and has also turned negative in the period of October-December 2021 and is yet to turn positive. Although in August 2022, the FMCG market volume growth has rebounded on the back of the festive season and lower base in the last year. The continued weaker volume growth has highly affected the topline performance, which the company has settled off via price hikes which has enabled the company to derive decent revenue growth.
Source: Company’s Quarterly Reports- Q1FY23, Investors Presentation, and Earnings Call Transcripts
In terms of volume growth in Q1FY23, Nestle India has reported the highest volume growth of 7.6% in the quarter April-June due to increased activity in the hotels, restaurants, education institutes & workplaces. Following Nestle India, Hindustan Unilever Limited (HUL) reported volume growth of higher mid-single digit of 6%, supported by the strong performance of home care and beauty & personal care segments. Marico has reported the highest volume de-growth of 6% due to the dip in India business, mainly in Saffola edible oil sales on account of high base & edible oil consumption shifting to economy brands & smaller SKUs due to extremely high inflation. Godrej Consumer Products reported volume de-growth of 5% due to soft performance in the Home Care business in India along with continued weaker performance in the Indonesia business. For Britannia, the slowdown in rural markets on account of high inflationary conditions and subdued market demand has resulted in a de-growth of 2% in volume in Q1FY23.
Raw Material Inflation:EBITDA Margin Trend:
Note: For ITC, Standalone FMCG-Others segment margins have been considered as Consolidated, including the Apparel business as well.
Source: HUL’s Q1FY23 Investor Presentation
Note: MT stands for Metric Tonne
Source: Britannia’s Q1FY23 Investor Presentation
The unprecedented inflation in the raw materials of FMCG companies has consistently impacted the company’s margins. The raw material inflation has peaked at a much higher level, not only YoY & QoQ basis but also trading much above their 10-year median levels. Along with the rise in the input cost, the rising value of the US Dollar against the domestic currency has also coupled with the impact of inflation to affect FMCG companies.Management Commentary on Inflation & Growth Prospects:
Because of margin pressure on the FMCG companies, the management of the companies also believes the operating environment to be challenging and growth to be price-led. The company will continue to take calibrated price actions to cut down the gap between the price hikes taken and the raw material costs. Here are some of the key management commentaries of the following FMCG companies from their Q1FY23 earnings call highlights:
1) Hindustan Unilever Limited:
- The management said that the Cost of Goods Sold (COGS) or simply the raw material prices will be higher in the September quarter as compared to the June quarter, and the price hikes taken by the company still lag the commodity price inflation. The management said that price hikes taken during the quarter, i.e., 12% are still lagging behind raw material costs, which were up by over 20%; hence, the company might continue to take calibrated price actions to mitigate the impact of raw material inflation.
- Earnings/Conference Call Not Available
3) Nestle India:
- The company witnessed early signs of softening in the commodities like edible oils and packaging materials; however, commodities like fresh milk, fuels, wheat, grains, and green coffee costs are expected to remain firm.
4) Dabur India:
- While the FMCG market data shows rural growth being suppressed against urban growth, for Dabur, management said that rural and urban demand growth was at par. Further, the company expects margins to contract in Q2FY23 as raw material inflation is relatively higher on a YoY basis.
5) Godrej Consumer Products:
- Management believes that volume and gross margin recovery might stabilize in Q2FY23. Rural Growth was subdued as compared to urban growth due to inflation. Management expects a gradual recovery with a good monsoon and inflation coming off for rural in the coming quarters. As per the management, the margins might remain to be in the mid-20% for the domestic market going forward. The company expects to see low to mid-single-digit volume growth with double-digit revenue growth.
6) Britannia India:
- The company is likely to take a 6-7% price increase in Q2FY23, which will take the total price hikes to around 20% in the past 6 quarters. Management expects normalization of EBITDA margin (to pre-covid levels) from Q2FY23 onwards and believes that peak inflation is behind, and normalization of margins might arrive in the coming quarter.
7) Tata Consumer Products:
- The company mentioned that there might be some pressure on tea margins in the very near term, but the margins will not go back to the depressed levels seen earlier. The company will focus on volume growth in the base salt product once the pricing is back on track.
- The company expects volume growth to turn positive from Q2FY23 under current demand conditions. Also, the company has been witnessing a fall in the raw material inflation for almost half of their raw materials and hence finds cushions for the impact on the margins and profitability. The management has guided that the EBITDA margin might moderate in the coming quarters due to higher investment in brands and expects it to be at the levels of 18% to 19% for FY23.
i) Easing of Raw Material Inflation
ii) Improving Consumer Demand Sentiment: FMCG market witnessed positive growth in volume growth in August 2022, which is expected to continue as well on account of the festive seasons ahead.
iii) Increasing Rural Reach: Many FMCG companies are focusing on increasing their rural reach, looking at the potential the rural market holds for FMCG companies. Currently, the rural market contributes only 40%-45% of the overall revenue of the FMCG companies, which is expected to grow faster than the urban market in the coming period.
iv) Rising Internet users: The increasing penetration of the internet and smartphones among individuals may boost online sales of FMCG companies and will act as a key growth driver for the sector.
What are the Near-Term Prospects for FMCG Companies:
Source: Ace Analyser (As of 12th September 2022)
The FMCG market grew by around 16% in the Calendar Year 2021 amid the lockdown situation during the year. This growth was mainly led by price growth as the volume growth remained under pressure. Here, the growth in urban areas was more resilient compared to rural areas, which grew faster earlier. Further, the sector is expected to report growth of a lower double-digit figure of around 10%-12% in 2022, as per the report of CRISIL. The favorable industry tailwinds are expected to drive growth for the sector. Still, despite a healthy outlook, the sector is witnessing challenges of raw material inflation and rural slowdown, which is a matter of concern for FMCG companies. Although the commodities' prices have started to cool off since the end of Q1FY23 but remains elevated on a YoY basis, and hence margins of the company may remain under pressure in the coming 1-2 quarters. All the FMCG companies are expected to continue with the step of taking calibrated price actions, as evident from their management commentaries. Talking about the near to medium-term prospects, the FMCG companies are expected to perform better on account of the festive season, which could boost their top-line performance. The company has been planning innovative packs, discounts & promotions, and increasing Ad-spends keeping an eye on the major festive season ahead. Further, the price hikes taken by the companies will also benefit them to gain margin over a longer period.