Price hike to help FMCG cos post higher revenues in Q3, volumes may get hit

Volumes estimated to remain weak; gross margins under pressure due to high raw material costs

Fast-moving consumer goods (FMCG) companies are expected to report healthy revenue growth on the back of price hikes which companies took to fend off commodity inflation in the October-December quarter (third quarter, or Q3) of 2021-22 (FY22). However, volumes may come under pressure due to a high base in the year-ago quarter, coupled with weak rural demand in recent months. Urban growth in the quarter gone by though has witnessed recovery.

Rural demand witnessed an impact towards the fag end of the second quarter (Q2), which continued in Q3FY22.

Brokerage PhillipCapital also cited delayed winters, which impacted the sale of skincare and immunity-growth products.

“Rural demand started to slow from the later part of Q2, and this slowdown has continued, primarily led by a high base effect and sharp increase in average selling price to pass on higher input cost,” Elara Capital said in its Q3 earnings preview report on the sector.

The brokerage also said that urban demand was better than rural in the quarter, led by improved mobility, pick-up in modern trade stores, and sustained e-commerce momentum.

Domestic brokerage ICICI Direct said in its earnings preview report that FMCG companies took price hikes to the tune of 5-15 per cent in the last six months to pass on high commodity costs.

Brokerages also said that out-of-home (OOH) consumption witnessed an uptick due to the economy opening up in the quarter, and improved mobility.

"We expect pressure on gross profits to sustain on year-on-year (YoY) due to increased downtrading, and inflationary pressure in the vegetable oil basket," PhillipCapital said in its report. It said it expects gross margin to improve sequentially for most companies due to the pricing action taken by them. 

Motilal Oswal Securities expects Hindustan Unilever’s (HUL's) domestic volume growth to be at a mere 2 per cent, and estimates a 130-basis point contraction in gross margins, compared to last year.

Elara Capital said it expects HUL, Nestlé India, Marico, and Jyothy Laboratories to report above-average revenue growth.

ITC is expected to report a revenue growth of 6.7-per cent YoY on the back of recovery in the hospitality and paperboard business, ICICI Direct said in its report and added that cigarette volumes could see 5-per cent growth on the back of normalisation of OOH activity.

Godrej Consumer Products and Marico are expected to report higher sales growth, but their volumes, too, are expected to come under pressure. Both companies have already said their volumes will be under pressure in their quarterly updates.

Colgate-Palmolive India is expected to see marginal rise in its volumes at 1 per cent and like other companies, its gross margins could take a hit YoY due to high raw material costs, said Motilal Oswal Securities.

Biscuit major Britannia Industries is expected to see its volume growth come in at around 6 per cent and could see an impact on its gross margins due to inflation in its key raw materials, according to Motilal Oswal Securities.

Consumer companies have not been on the same page during the quarter with regard to their budgets for advertising spends. Most companies have reduced their advertising spends, but some continued to spend, despite weak demand, in order to strengthen long-term brand equity and fend off increased competitiveness, said PhillipCapital.

The cost control/savings measure, after the gross margin level, will play an important role in determining operating profit (or earnings before interest, tax, depreciation, and amortisation) margins, as seen in the past.

But what the Street will also keenly watch out for is the commentary on the demand side, especially rural. Any positive newsflow on this front could help improve the Street sentiment towards the FMCG counters, said experts.