Results preview: FMCG firms confident of strong Q3 revenue growth

Rural demand continues to remain under pressure

Price hikes effected over the past year are expected to drive revenue growth for fast-moving consumer goods (FMCG) companies in the October-December quarter (Q3) of financial year 2022-23 (FY23).

Volumes are expected to grow in the low single-digits because of reduction in grammage, inflation, and weakness in rural demand, a trend that FMCG companies and analysts highlighted ahead of the results.

In its quarterly update, Godrej Consumer Products said the FMCG sector witnessed sluggish growth driven by poor rural consumption and a slowdown after the festival season. “We expect to deliver double-digit sales growth backed by low single-digit volume growth,” it said.

Dabur India echoed this sentiment, saying demand remained weak because rural markets remained under pressure. Besides, the late onset of winter in North India had added to the weakness, it said. However, the firm said there were signs of a recovery towards the latter part of the quarter, coupled with easing of inflation.

Marico, too, spoke about the slowdown in rural consumption in its update. It said, “Recovery in rural demand was not as discernible as retail inflation stayed at elevated levels.”

However, the maker of Parachute coconut oil said there was some improvement in demand in specific categories because of the festive season and onset of winter.

Analyst take

Motilal Oswal said in its preview for the sector that volumes and revenue were likely to remain subdued in Q3, but “some categories such as biscuits and cigarettes are showing signs of demand resilience”. It added, however, that there were no clear signs of recovery in rural demand. “We expect sales in staples to be driven by price increases and some premiumisation.”

Kotak Institutional Equities said it expected a stable compound annual growth rate (CAGR) in revenue for staples as there was no incremental improvement or deterioration in demand across both rural and urban areas.

On urban demand, Phillip Capital said in its preview that more premium and discretionary items continued to hold strong while the mass market continued to witness pressure on the volume front.

On the rural front, Nuvama Institutional Equities noted that the lower-end of the rural job market had witnessed some improvement, but it was still early. “General inflation and rainfall deficit in populous states like Uttar Pradesh, Bihar, West Bengal, and Jharkhand remain key challenges,” the brokerage pointed out.

It said volumes could grow in FY24 because of a reversal in grammage cuts in biscuits, soaps and other consumer products as cost pressures ease.

Dolat Capital expects Hindustan Unilever to deliver 25 per cent revenue growth in home care, 10 per cent in personal care, and 6 per cent in the food & refreshments categories. It also noted that price hikes in excess of 10 per cent in select categories would help improve margins.

The brokerage said Britannia Industries witnessed aggressive pricing actions of 15 per cent aided by revenue growth in Q3, which would translate into revenue growth of 19 per cent. “Margins expected to improve sequentially helped by price hikes,” Dolat Capital said.

On ITC, Phillip Capital said, “Cigarette volume has surpassed pre-Covid levels; however, FMCG business to see muted volume growth.” It said it expected the hotels and paper businesses to fire up owing to a favourable base.