The first quarter of FY24 has kicked off on a relatively positive note for FMCG companies, shifting the downbeat mood in the sector. Signs of an uptick in volume growth and rural recovery were visible as inflationary pressures declined. Prices of key raw materials like crude, palm oil, wheat and packing materials have remained stable, enabling many companies to reduce prices across segments.

Rural volume growth, which has been lagging behind urban growth, has finally turned positive after several quarters. Rohit Jawa, the MD and CEO of Hindustan Unilever (HUL), said, “Market volumes are recovering gradually. The rural market’s volume growth has turned positive this quarter, and we are seeing sequential improvements.” However, he added that this growth comes on the back of a low base in Q1FY23. There are also still forward risks for rural growth due to El Nino and an erratic monsoon.

Most FMCG giants saw their gross margins expand on a YoY basis, growing by 270 bps YoY (average of the firms in focus), led by declining raw material costs. However, this decrease in inflationary pressures has increased competition, especially from smaller regional players.

Companies in general believe that the worst is over and expect volumes to gradually improve in the coming quarters. But they are cautious in their optimism due to competitive pricing actions, the El Nino effect, and commodity price fluctuations.

Despite the improving market conditions, the performance of some of the biggest FMCG companies in Q1FY24 failed to excite the street over the past three months. Most of them underperformed the Nifty 50 index.

Large FMCG firms underperform the Nifty 50

Only Tata Consumer Products managed to outperform the Nifty 50 index and Nifty FMCG. The Nifty FMCG also underperformed the Nifty 50.
 

FMCG companies have low valuations across the board

According to Trendlyne’s DVM classification, HUL, Nestle India, Britannia Industries and Tata Consumer Products have high durability scores. In contrast, all the companies in focus have medium momentum scores, implying average to low bullish sentiment in the markets.

But all these companies have low valuation scores, suggesting they are trading at expensive levels.

Volume growth drives revenue

All large FMCG players saw top-line growth on a YoY basis in Q1, with volume growth driving their revenues. The stability in  commodity prices led most of these players to refrain from the price hikes of the previous quarters. For the rest of FY24, most firms expect price increases to be flat as volumes drive growth.

Volume uptick and premiumisation lead revenue growth

Nestle India leads the pack with a 15.4% YoY rise in revenue due to strategic pricing, volume growth and a better product mix. The company saw healthy growth across its segment categories and geographies.

Godrej Consumer Products and Dabur India’s revenue growth was largely driven by robust volume growth in the domestic market. On the other hand, Tata Consumer Products stood out with a revenue growth of 12.5% YoY through price hikes. Sunil D’Souza, the CEO of Tata Consumer Products, said, “While growth is noticeable in all our categories and markets, it’s important to note that this is price-related primarily.”

HUL and Britannia grew comparatively slower, driven by intensified price cuts to hold off competition from regional players.

Net profit grows as input costs decline

Net profit growth has been robust for all the FMCG companies covered, except for Godrej Consumer Products, driven by lower input costs and operational efficiencies. However, cost pressures are persisting in some areas due to the high prices of a few commodities like milk and flour. Britannia Industries leads the pack in YoY profit growth, followed closely by Nestle India.

Britannia Industries lead in YoY profit growth

Godrej Consumer posted a YoY net profit decline due to a one-time expense, including a  stamp duty payment of Rs 77.5 crore and restructuring costs related to the acquisition of Raymond Consumer Care. It was also marginally impacted by the devaluation of the currency in Nigeria, a key market.

Trendlyne’s Forecaster estimates double-digit growth for most FMCG players

The outlook is good for most of the FMCG companies in focus. Trendlyne’s Forecaster estimates double-digit annual revenue growth for them in FY24. Only HUL and Britannia’s growth projections are relatively lackluster, with the former’s revenue estimated to grow by 4.5% YoY and the latter’s by 7.7% YoY.

Forecaster estimates healthy revenue growth in FY24

Among these companies, Nestle is expected to grow by 14.5% YoY, the highest among the lot, followed by Godrej Consumer rising by 12.5% YoY.

The FMCG growth story in FY24 is so far, a volume story 

Godrej Consumer led the charge in volume growth, with its consolidated volume rising by 10% YoY, thanks to healthy demand in the domestic market. HUL, Nestle, Dabur and Britannia’s volumes grew in the single-digits.

A complete recovery in volumes is expected to be delayed by two to three quarters following the implementation of all price cuts. The gap is due to the higher cost of inventory at the distributor and retail levels.

Dabur India is optimistic about rural recovery, expecting increased consumer spending due to a 10% hike in wage rate under MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), higher minimum support price (MSP) for crops, and strong kharif sowing.

Lower commodity prices and cost optimisations drive margin expansion

FMCG companies’ gross margins improved on the back of lower raw material prices and cost optimisation initiatives. Godrej Consumer saw the biggest expansion in margins, which grew by 7.1 percentage points YoY to 53.7% in Q1FY24. Along with lower input costs, healthy volume growth aided its margins. Britannia came in second with its margins rising 5 percentage points YoY to 41.9%. Tata Consumer, is the exception, with a slight 40 bps YoY dip in gross margins.

Gross margins rise as inflationary pressures ease

Although lower inflation helped margins improve, it also enabled smaller regional players to re-enter the market, increasing competition. Consequently, FMCG giants have lowered prices further to maintain market share, impacting margin and sales growth. Varun Berry, the Vice-Chairman and MD of Britannia Industries, said, “When  inflation is high, local players just walk away. And when things start to become a little more normalized, local players come into the market and start to operate large schemes for customers.”

FMCG companies start increasing ad-spends

Given the competitiveness, advertising spending has increased across the sector. With improving macroeconomic conditions, companies are investing in their brands to gain market share as demand trends improve.

The worst is behind but challenges remain

The FMCG sector appears to be returning to its pre-Covid market dynamics, where growth was largely led by volumes and not just price hikes. The management of companies are relatively more optimistic about recovery than they were in the previous quarters.

Speaking about the outlook, Ritesh Tiwari, the CFO of Hindustan Unilever, said, “The operating environment remains volatile, and we need to closely monitor the unfolding events.”

Although the quarter has been a promising start to FY24, the sector faces challenges in the form of increased competition from regional players and potential disruptions caused by weather patterns. As the industry advances, the wins are not going to come easily.

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.