Double-digit volumes to drive Q1 growth for Godrej Consumer, Marico

Margins, however, are expected to correct on a YoY basis

The June quarter operational updates by Godrej Consumer Products (GCPL) and Marico point to a strong double digit volume and sales growth for the two companies and for the broader fast moving consumer goods sector.

GCPL highlighted that sales growth in the domestic market would be in the high teens, driven by strong volume growth and calibrated price increases. Within its categories, household insecticides and personal wash led the double digit sales growth as consumer focus on hygiene and a lower base (1 per cent down in Q1FY21) aided the growth. GCPL is expected to outperform its peers in the quarter as well on a two-year like-to-like basis. The company indicated that the two year annual growth would be in double digits.  

Say Jaykumar Doshi and Sushruta Mishra of Kotak Institutional Equities, “Overall, India business performance is better than expected and will be likely ahead of peers Hindustan Unilever (HUL), Dabur and Marico on a two-year comparison. Improved execution in India and Africa and recent augmentation of leadership strength augur well.”

Marico, too, indicated strong domestic revenue growth of 30 per cent plus in the quarter led by double digit volume growth. The growth, however, has come on the back of a low base; volume and sales growth declined 11-14 per cent in the year ago quarter. Its key segments of hair oil, edible oil, foods and premium personal care posted strong growth or witnessed steady recovery.

Even as volume growth is recovering the company indicated gross margins would remain under pressure in the quarter given high cost inventory. Operating profit margin is expected to see a sharp hit as compared to the year ago quarter. The company attributed the decline to the high base of 24.3 per cent last year due to lower marketing spends and higher input costs. Analysts at Sharekhan Research expect a margin fall of 350-400 basis points y-o-y. With copra prices correcting from their peaks in February and expected to fall further and edible prices to stabilise, Sharekhan expects margins to improve in the coming quarters.

While most agri-commodities saw benign inflation or a fall, crude oil, palm, tea and packaging costs have seen a surge in prices as compared to the year ago levels. Analysts at Motilal Oswal Research (MOSL) expect most companies to experience some degree of material cost inflation and are likely to experience gross margin pressure, despite price increases taken during the quarter.

Most FMCG companies are expected to witness growth in the staples segment, though the discretionary segment would take time to recover to Q1FY20 levels. Barring Britannia which had exhibited a strong growth in the year ago quarter, the larger FMCG companies are expected to post volume growth of 15 per cent plus in their domestic operations. The top picks for MOSL are GCPL, HUL, Britannia and Dabur.