FMCG index slips 3% on weak Q2 results; HUL tanks 8%, Nestle hits 52-wk low

In the past one month, the FMCG index has tanked nearly 11 per cent, as against 6 per cent decline in the BSE Sensex.

Shares of fast moving consumer goods (FMCG) companies were under pressure, with the sector giant Hindustan Unilever (HUL) tanked 8 per cent to Rs 2,452.60 on the National Stock Exchange (NSE) in Thursday’s intra-day trade after the FMCG major reported a lower-than-expected September quarter (Q2FY25) earnings. 

 

At 12:03 pm; Nifty FMCG and BSE FMCG indices were the top losers among sectoral indices, down 3 per cent each. In comparison, the Nifty 50 and BSE Sensex were down sub 0.25 per cent. In the past one month, the FMCG index has tanked nearly 11 per cent, as against 6 per cent decline in the benchmark index.

 

 

Besides, HUL, Dabur India, Godrej Consumer Products, Nestle India, Varun Beverages, Marico and Colgate-Palmolive (India) from the FMCG index were down between 3 per cent and 4 per cent. ITC and Britannia Industries were down 2 per cent each.

 

In the September quarter, FMCG demand witnessed moderating growth in Urban markets while Rural continued to recover gradually.

 

HUL’s net sales rose 1.5 per cent year-on-year (YoY) to Rs 15,319 crore, below analyst’s estimates, led by 3 per cent YoY value and volume growth each in the domestic segment dragged down by moderation in urban growth even as rural growth is gradually trending upwards. 

 

Gross margin contracted by 170 bp YoY (down 40bp sequentially) to 51 per cent in Q2FY25. With the gap between net material inflation and price hikes narrowing, management expects low single-digit price hikes in FY25F. Advertising expenses are expected to remain elevated, keeping the earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin range-bound.

 

Analysts remain cautiously optimistic expecting low single digit (LSD) volume growth as near term operating environment continue to be competitive. Price hikes in tea and soaps should aid sales growth going ahead. The brokerage firm expects the demand scenario to remain subdued in the near term, but initiatives laid out to drive the recovery in mass and premium ends of the portfolio should aid a gradual recovery.

 

JM Financial Institutional Securities cut HUL’s earnings by 3 per cent to factor in Q2 weakness. The stock has corrected 19 per cent from its recent peak as the narrative based run-up seen since election is getting retraced with underlying demand scenario remaining challenging & the brokerage firm expect it to remain under pressure in near term. Further rerating will be contingent on better visibility on volume acceleration & double-digit earnings growth.  CLICK HERE FOR MORE DETAILS 

  Meanwhile, Nestle India was down nearly 4 per cent at Rs 2,232, hitting its 52-week low. Thus far in the month of October, the stock of packaged foods company has dipped 17 per cent.

 

Nestle’s Q2FY25 revenue growth was disappointing; it further de-accelerated to 1 per cent YoY (vs 4 per cent in Q1FY25) due to subdued consumer demand (urban has been witnessing decelerating demand trends over last few quarters).

 

Gross margin was largely flat (despite significant inflation in key inputs) while EBITDA margin declined ~155bps YoY to 22.4 per cent due to operating deleverage. Higher prices of key raw materials (cocoa, coffee etc.), margins are likely to remain under pressure. That said, Nestle appears to have a market share gain opportunity given the relative immunity from cocoa inflation as its key brands KitKat and Munch have lower cocoa content vs competition (5 per cent vs 20 per cent in Cadbury), analysts at ICICI Securities said in Q2FY25 result update.

 

However, analysts at Axis Securities remain positive on Nestle from a long-term perspective, as current challenges such as lower volume growth and volatility in raw material prices are expected to be short-term in nature. With the rural market anticipated to recover in the coming quarters, Nestle is well-positioned to benefit, given its substantial expansion in rural presence over the last three years, increasing its reach from 110k to 200k villages.

 

Additionally, its long-term initiatives include: 1) Efforts toward rural penetration and market share gains through the RURBAN strategy, 2) Constant focus on innovation (launching 125 products in the last seven years), thereby driving growth, 3) Driving premiumization in core categories (e.g., Maggi noodles range) and launching differentiated products, 4) Entering new categories of the future (e.g., Nespresso, Purina Pet Care, and Gerber’s for toddler nutrition), 5) Introducing a D2C platform to engage consumer attention, and 6) Renewed focus on its fast growing nutraceutical portfolio, the brokerage firm said.