FMCG Banks on Q3 Market Revival
Having witnessed sluggish growth in the first quarter and a price-led growth in the second, the FMCG business is hoping that Q3 will signal the revival
The consumer goods industry is hoping that a real revival awaits them in the third quarter of the current financial year, based as it always is on a robust growth in the rural sector, aided by good monsoons and a more than decent harvest. FMCG giants appear confident that the green shoots visible now would bloom post the festive season.
During the July to September timeframe, top FMCG companies such as Hindustan Unilever, ITC, Tata Consumer, Brittania and Marico reported some pressure on their margins, which was a carry forward from the first quarter of FY 2022. All the companies said the demand environment remained challenging as inflation impacted consumption.
There’s a silver lining out there
However, there was a softening of commodity prices during the quarter as a result of which the FMCG companies are hoping for a sequential improvement in gross margins. During the second quarter, these companies had reported a price-led topline growth. However, some companies such as Brittania, Dabur and Nestle have reported volume growth.
In fact, Marico had stated in its recent earnings report that retail inflation had resulted in a drop in volumes for the fourth quarter in a row and that higher pricing covered up for some of the decline in top line growth. The company also said demand stayed flat over the past two quarters with some green shoots visible late in September and in October.
The company had posted a 3% decline in net profits at Rs.307 crore in Q2 though its revenues from operations were up a similar quantum at Rs.2,496 crore. Now the company is eagerly looking at the growth in volumes from rural markets, which is dependent on the quality of monsoons as well as the overall crop yield.
Companies saw a tough two quarters
This appeared to be the trend in Q2 with companies such as Brittania also reporting higher revenues due to higher prices caused by inflation. In the case of Brittania, rising prices of flour and milk products removed some of the sheen during the second quarter. However, net profits went up 28.5% to Rs.490.58 crore as total revenues touched Rs.4,379 crore in Q2.
We had reported earlier about how Hindustan Unilever was concerned over the inflation picking up in the Indian economy. Since then, the company has reported a softening of commodity prices that could help things settle down in the current quarter. HUL CEO Sanjiv Mehta was quite confident that the FMCG industry would bounce back during Q3 and Q4 of the fiscal year.
Rural income growth is the key
Archrival ITC also had its revenue go up by around 21% during the second quarter though they remain concerned about the existence of inflation in some of the products, albeit with some levels of moderation creeping in. Normal monsoons and proactive RBI interventions could result in consumption expenditure growth during October to March next, they feel.
Last, but not the least, Tata Consumer Products reported in its quarterly report that inflation and India’s rupee depreciating against the dollar could create some issues. The company’s profits were up 36% at Rs.389.4 crore while operations revenue grew by nearly 11% to Rs.3,363 crore during the second quarter.
The company is hoping for some stability in both inflation as well as the exchange rate over the next month to two, though they agree with the general consensus that rural income growth would be one crucial factor that impacts sales growth from here on.