Deflating commodity costs to aid FMCG firms in H2FY23: Analysts

Higher food inflation, sluggish demand, and weak macro environment skewed purchasing power among consumers in the April-June quarter of FY23 (Q1FY23). All this impacted the fortunes of consumer goods companies, said analysts, who expect the second half of fiscal FY23 (H2FY23) to be better as commodity prices cool off. That apart, they expect a gradual pick-up in demand.

At the bourses, the Nifty FMCG index has outperformed with a gain of over 18 per cent thus far in FY23. In comparison, frontline indices like Nifty50 and the S&P BSE Sensex have gained over 1 per cent each, during the same period. Among individual stocks, HUL, Tata Consumer Products, ITC, Britannia Industries, Colgate India and Marico have surged up to 28 per cent so far in FY23, data show.

At the fundamental level, FMCG companies such as Hindustan Unilever (HUL), Britannia, Nestle India, and Dabur have reported mixed results in the June 2022 quarter (Q1FY23) as raw material inflation and rupee depreciation dented the overall show. Muted rural demand, too, triggered de-growth in volumes across select categories.

However, in the past two months, prices of key inputs such as palm oil, wheat, edible oils, and crude oil have corrected up to 50 per cent. The sharp inflation in agri-commodities and crude derivatives had prompted most FMCG companies to undertake 10 to 15 per cent price hike in the last one year. With commodity prices deflating from their March peak levels, analysts expect the margin profile across consumer goods companies to improve going ahead. On their part, FMCG companies, too, are hopeful that the worst could be over.

Moreover, the recent milk price hike by Rs 2 per litre by dairy suppliers like Mother Dairy and Amul would not significantly impact the overall FMCG basket, said analysts. AK Prabhakar, head of research, IDBI Capital expects the demand momentum to remain intact as the price reduction in palm oil would offset price hike in milk-based products.

Among individual stocks, Nishit Master, portfolio manager, Axis Securities remains bullish on prospects of HUL, Varun Beverages, and ITC in FY23. “The fall of commodity prices will benefit the FMCG sector in the second half of FY23. Though sustenance of volume growth remains a concern, easing inflationary pressures will act as a growth lever. We expect companies like HUL, Varun Beverages, and ITC to benefit from fall in commodity prices and higher market share gains,” Master added.

A recent report by NielsenIQ suggested that the FMCG sector is expected to clock a value growth in the range of 8 to 10 per cent in 2022 on the back of increased consumption. A sequential improvement in volumes is also expected to revive demand in rural markets, said analysts. The upcoming festival season and normal monsoons are also expected to act as growth triggers across price-sensitive rural markets for FMCG companies.

“We believe that the inflation may be peaking out as commodity prices cool off. With the onset of the festive season and a healthy monsoon, we expect rural demand to pick-up. Further, a trend reversal is expected on the Ebitda margin front. We remain bullish on the FMCG for FY23,” said Sneha Poddar, assistant vice-president, research analyst, broking & distribution, Motilal Oswal Financial Services.