A new earnings season for the new financial year has begun. This is a critical quarter for investors: while company CEOs like to paint a pretty picture in their forecasts, the Q1 results will give everyone a dose of reality.It's already clear that Indian IT is feeling the heat of a global slowdown. This sector was a pandemic star, with soaring IT spending during lockdowns. However, other previously beaten down sectors like FMCG may now see a recovery, giving investors a ray of hope.
In this week’s Analyticks:
- The FMCG sector gets a boost as commodity prices cool off
- Screener: Companies seeing their stock prices rise ahead of Q1 results
Let’s get into it.
The FMCG sector is set to post another weak quarter. But is the worst finally over?
There is a saying that ‘When you hit rock bottom, you can only go up’. After the Russia-Ukraine conflict broke out, commodity prices witnessed ‘unprecedented’ levels of inflation, as Hindustan Unilever’s chairman put it.
This meant a hard time for India Inc, but it was the common man who bore the brunt as price increases were seen in virtually every product, from onions to cooking oil. Now, there are some signs of relief.
Consumer price inflation or CPI fell from peak levels of 7.79% in April 2022 to 7.01% in June 2022. Although the CPI is still above its tolerance levels, the RBI expects inflation levels to gradually ease in H2FY23 (contrast this to the US economy, where CPI for June has hit an eye-watering 9.1%).
In other good news for India, the southwest monsoon covered the entire country on July 2, six days in advance. According to the India Meteorological Department, between June 1 and July 12, India’s cumulative rainfall was 9% over its long-term average. This definitely bodes well for consumer demand in rural India, whose fortunes depend on a bumper kharif season.
This helps the FMCG sector, which has been struggling with input costs. In just the past one month, the Nifty FMCG outperformed the Nifty 50 by over 10 percentage points.
Palm oil, which is a key input for FMCG players like Hindustan Unilever, Godrej Consumer, Britannia and Nestlefell over 35% in price since May 2022. Notably, India imports 95% of its palm oil requirements from countries like Indonesia and Malaysia. Back in May 2022, Indonesia relaxed its export restrictions, which ultimately eased the tight supplies of palm oil.
Moreover, Brent crude spot prices fell by over 10% from their peak levels of $120/bbl on fears of a global recession. This will especially benefit FMCG players in the form of reduced packaging costs. It’s worth noting however, that oil prices have been very volatile, and may rise again when Chinese lockdowns end.
While the dark clouds over this sector are beginning to clear, Q1FY23 has proved to be yet another challenging quarter.
FMCG players are in for yet another forgettable quarter
Successive price hikes taken by FMCG companies have impacted consumer demand, especially in rural regions in Q1FY23 as well. Companies like Marico witnessed significant downtrading in their edible oil brand ‘Saffola’ as consumers switched to economy labels like Sunpure and Fortune. Moreover, the company witnessed a 1-2% volume fall for its flagship product ‘Parachute’ despite passing on the benefit of price deflation for copra, a key input, onto consumers.
On a positive note, Dabur and Godrej Consumer witnessed double-digit revenue growth for their personal care portfolio. Dabur also saw strong traction for its food and beverage vertical as out-of-home consumption resumed in Q1FY23.
However, input cost pressures will weigh negatively on the gross margins of FMCG players in Q1FY23. Even though the prices of edible oils softened at the end of the quarter, FMCG companies consumed high-cost inventory overall.
Green shoots of recovery might appear from Q2FY23
FMCG players generally carry two months of inventory and have some forward contracts in place to satisfy consumer demand. Hence, they will see the benefit of lower edible oil prices on their gross margins only from September 2022, according to Edelweiss. Basically, investors will see a real improvement in gross margins somewhere in H2FY23.
Consensus estimates from Trendlyne’s Forecaster see FMCG players clocking 12%+ net profit growth on an average in FY23. However, these estimates haven’t been revised upwards in the last 60 days as market forces remain cautious of the sustainability of this recent cool-off.
Notably, the actual cool-off in edible oil prices began only in June 2022, and it is still early to judge if the trend will continue. Crude oil is operating at higher levels despite recent corrections. While ICICIDirect does anticipate further correction in commodity prices in the next 3-6 months backed by interest rate hikes, uncertainty in the macro-economic environment remains.
However, if commodity prices do head back down to their median levels, FMCG players will be able to pass on this benefit to the consumers. This will then stir-up demand and positively drive companies’ sales volume growth in H2FY23.
According to HUL’s chairman Nitin Paranjpe, the FMCG sector is still nowhere close to its normal health. However, there is a clear signal that better times lie ahead of it with a normal monsoon season on the cards and commodity prices down from their peaks.
Screener: Banking and Finance stocks see a rise in their prices ahead of results
This screener looks at companies that have seen their stock price rise in the past week, ahead of their results.
The screener has 75 companies from the Nifty 500 and 14 from the Nifty 50. The Banking and Finance sector is especially well-represented, with companies like HDFC Bank, Angel One, Axis Bank, Bank of Maharashtra, and Federal Bank seeing stock prices rise.
Angel One rose 7.1% in the past week, ahead of its result release on Thursday. The stock has given returns of 32.5% in the past year, supported by a 2X growth in net profit. This along with good operational numbers released in the past week has put faith in the company for further growth in Q1FY23.
Hindustan Unilever’s stock saw a price rise of 4.1% in the past week with its results releasing next Tuesday. With a YoY net profit growth of 11.1% in FY22, this FMCG major has done well despite it being a tough time for the FMCG sector.
With Oberoi Realty releasing its results on Friday, the company’s stock saw a rise of 9.7% in the past week despite house sales going down by 15% in Q1FY23. The stock gave healthy returns of 20%+ in the past year while its TTM net profit rose by 40%+ YoY.
You can find some popular screeners here.
