FMCG companies saw signs of a recovery in Q4FY23 after a series of challenging quarters. “I wouldn't say that we are out of the woods yet, but we have started seeing volume growth coming back,” Sunil D’Souza, CEO and MD of Tata Consumer Products, said.
As inflation eased up in the past six months, companies began cutting prices and increasing product quantities. This price-cutting strategy has paid off, with sales volumes in the FMCG sector improving. However, inflation is still not fully under control, and price cuts have been limited to certain categories. The recovery will likely be a gradual one.
Urban markets have returned to positive volume growth, while rural growth remained muted but improved sequentially. Ritesh Tiwari, CFO of Hindustan Unilever, said, “Talking about FMCG market growth from an urban-rural lens, urban markets continue to lead the growth for FMCG. Rural has shown some signs of improvement with higher value growth sequentially. While volumes continue to decline, the extent of decline has reduced versus last quarter.”
The packaged foods and beverages category delivered exceptional performance and continued to drive industry growth. The personal and home care segment also saw an upward trend. Another aspect driving growth in the packaged foods segment is its relatively higher presence in urban markets.
FMCG players still expect a hit to near-term demand from inflation-induced cost pressures. Sunil D’Souza added, “The impact of inflation and monetary tightening on economic growth and demand seems to be slowing down, but I would keep my fingers crossed and monitor it closely.”
Most FMCG Players outperform the Nifty 50 index
Visible signs of improvement in volumes and overall demand have brightened the outlook for the FMCG sector. The Nifty FMCG Index has comfortably outperformed the Nifty 50 Index over the past six months.
Barring Dabur India and Tata Consumer Products, all other stocks beat the Nifty 50. Only Godrej Consumer Products outperformed the Nifty FMCG index.
Most FMCG firms have high durability scores but trade at expensive levels
According to Trendlyne’s DVM classification, Hindustan Unilever (HUL), Nestle India, Britannia Industries and Tata Consumer Products have high durability scores, while Godrej Consumer has a good momentum score.
But these companies all have weak valuation scores, suggesting they are trading at expensive levels. Most of the FMCG players have medium momentum scores, implying average to low bullishness in the market.
Volumes improve, but revenue growth driven by price hikes
All the FMCG companies in focus witnessed revenue growth in Q4FY23 due to price hikes. However, the gap narrowed between volume growth and pricing growth. As the prices of major commodities softened, FMCG players increased grammage and cut prices in some categories to boost volumes. Also, the intensity of price hikes across the industry decreased in Q4FY23.
Nestle India led the pack in terms of revenue growth with a growth rate of 21.3% YoY. Its healthy top-line performance was driven by robust growth in volumes in both urban and rural markets. Nestle’s focus on improving its rural footprint over the past few quarters has yielded positive results. The company’s volumes increased in the rural market. while most other FMCG companies’ volumes continued to remain under pressure.
Dabur India’s revenue grew the slowest, rising by only 6.4% YoY. This was due to declining volumes in its health & personal care and over-the-counter products categories. Its relatively high exposure to the rural market was a drag on growth.
Declining raw material expenses and cost controls drive profit growth
All the highlighted companies’ net profits increased on a YoY basis in Q4FY23. Along with sales growth across segments, moderating commodity prices and cost controls drove profit growth. However, cost pressures still persist due to high prices of key commodities like milk and wheat.
Britannia’s net profit rose by 47.1% YoY to Rs 558.7 crore, the highest among its peers. Despite weak volume growth, significant distribution gains in rural India and price increases along with cost realisation initiatives boosted net profit. The company gained rural market share as it increased the number of rural distributors and the number of outlets it directly reaches. The management said that the company received incentives worth around Rs 90 crore through the PLI scheme.
Godrej Consumer Products came in second with its net profit growing 24.5% YoY to Rs 452.1 crore, led by robust volume growth and cost optimisation initiatives.
Trendlyne’s Forecaster estimates double-digit growth for most FMCG firms
As inflation subsides and demand slowly picks up, Trendlyne’s Forecaster estimates double-digit growth in annual revenues for all the companies in focus in FY24, with the exception of HUL. Tata Consumer Products is expected to take the lead with a revenue growth rate of 22.9% YoY, followed by Nestle India (14.5% YoY).
The outlook for HUL is comparatively dull, as Forecaster predicts a more modest annual revenue growth rate of 6.8% YoY for FY24.
Improvement in volume growth brightens prospects of recovery
FMCG companies are optimistic about the medium-term due to the signs of rural recovery and volume growth in Q4FY23. Godrej Consumer’s underlying volume grew by 6% YoY, driven by robust growth in the home care segment. Tata Consumer Products also saw an 8% YoY volume growth in its India foods business, while Dabur posted strong volume growth in its food business.
Hindustan Unilever’s volume growth was encouraging at 4% YoY, but it was lower sequentially. Whereas, Nestle India witnessed volume growth in both urban and rural markets.
With raw material prices cooling, increasing volumes and a gradual improvement in demand, FMCG players are aiming to capture growth by expanding their product offerings. Also, some companies are exploring inorganic opportunities.
Godrej Consumer recently announced the acquisition of Raymond’s FMCG business for Rs 2,825 crore, which marks its entry into the deodorant segment. Also, Nestle SA (the parent company of Nestle India) is reported to be among the final bidders for Capital Foods, the owner of Ching’s Secret (manufacturer of instant noodles).
Gross margins improve sequentially, but inflation hinders YoY expansion
Looking at gross margins, the trend is similar to Q3FY23, with most FMCG firms seeing a contraction in margins on a YoY basis due to higher commodity prices. Although the prices of some commodities like palm oil, crude oil and coconut oil have declined, milk and wheat prices still remain above comfort levels.
Only Britannia Industries and Godrej Consumer Products witnessed a YoY expansion in gross margins. Britannia saw the highest margin growth, with an increase of 6.9 percentage points YoY. This expansion comes on the back of the benefits from forward contracts, procurement efficiencies and price hikes. Godrej’s margins grew by 3.4 percentage points YoY, driven by a robust performance in the India-branded business.
However, with prices of key raw materials and commodities declining, gross margins for most companies have improved on a QoQ basis. The only exception is Nestle India, which saw a decline in gross margins even on a QoQ basis due to higher prices in agricultural commodities like milk, edible oils and wheat.
FMCG companies navigate challenges on the path to recovery
As inflation has started easing, FMCG companies expect the gap between volume growth and price growth to narrow. These companies are focusing on chasing volume growth and market share gains. However, cost pressures are expected to remain in the short term, making the recovery a slow one.
Ritesh Tiwari, CFO of Hindustan Unilever, said, “Looking ahead, the near-term operating environment is likely to remain volatile with global slowdown risk and weather-related uncertainty.”
While the performance in Q4FY23 indicates a promising rebound, the impact of inflation and weather phenomena like El Nino and heat waves remain a concern, as they could still disrupt the overall growth trajectory.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.