FMCG share price target

Currently, most large staples companies have higher contribution of marketing- led (driving awareness, innovation, premiumisation etc.) initiatives in growth as compared to a few years back when sales-driven initiatives (distribution expansion, throughput improvement) were one of the major growth drivers.

Inflation cast a long shadow over Q3FY23 for FMCG companies, as costs ate away at volume and demand growth. Rising costs forced FMCG firms to focus on price hikes for revenue growth, and rural consumption dropped for the sixth consecutive quarter. The depreciating rupee didn’t help - that along with input cost pressures and sluggish demand, worsened pressures on margins.

Global SMP prices have corrected 35% YoY in Feb’23. Even after adjusting for benefits of INR depreciation, we believe the profitability in SMP exports is very weak. Lower SMP exports will likely reduce the mismatch between demand and supply of milk in India.

In India, a ‘growth market’, investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume performance is good (as it’s DCF- accretive). 10-year CAGR volume growth performance of ~4-7% (includes mix benefits (in some cases) and population growth) appears underwhelming while margin expansion (premiumisation-led) has been impressive.

The FMCG industry has seen volume declines for 4 consecutive quarters till Q2FY23, owing to double-digit price hikes over the last 6 quarters. Q3FY23E has seen similar market conditions. The quarter is expected to see continued declining/ flat volumes, growth led by pricing, a higher impact on rural demand, and weakness in bottom-of the-pyramid products and price points.

Consumer sector overvaluation in Dec’22 is at 22% (per I-Sec Consumer Momentum Indicator (ICMI)) versus 29% in Sept’22. Though Staples' demand environment continues to be (relatively) muted, there are expectations of rural demand recovery.

Wholesale milk prices pan India continue to increase both MoM and YoY. Dairy companies have also raised milk selling prices by 8-10% in the past ten months due to sustained rise in milk procurement prices.

After a year of subdued demand due to covid led restrictions in FY21, Amul reported
strong revenue growth of 18.6% in FY22 YoY. Most consumer products’ revenue grew in double digits, and our analysis of market and growth rates of Amul indicates the company has likely gained market share in most segments.

FMCG companies continue to face cost pressures despite a slight fall in commodity prices. Except for palm oil, most other key raw materials like soda ash, milk, barley and wheat remain volatile and elevated.