All eyes on rural demand in third quarter results of FMCG companies

Expectations for Q3 volume growth are down sequentially, but revenue growth is likely to be supported by an increase in product prices. “Analysts at Jefferies India Pvt Ltd are expecting 9 per cent revenue growth (for HUL), coupled with 2% volume growth due to pricing.”

As other fast-moving consumer goods (FMCG) companies announce their Q3 results, investors can expect a similar theme of lower volume growth and higher pricing. Gross sector revenue growth is expected to moderate sequentially. Analysts said, “Volume growth rate of HPC & Foods (FMCG firms) has slowed significantly (JM Financial’s estimate of 1-2% versus 5% in Sep-Q), somewhat offset by higher pricing in some commodity cost pressures. with,” analysts said. In JM Financial Institutional Securities Ltd. “While this leads to a decline in revenue growth at Staples, the two-year CAGR may not be much different from (Q2) due to the higher price component,” the brokerage said. CAGR is the compound annual growth rate.

Marico Limited is expected to be one of the best performers in terms of revenue growth. In its pre-quarter update, it said Q3 consolidated revenue growth was in the low teens. Marico’s December quarter domestic volumes are expected to be flat year-on-year (year-on-year), compared to growth of 8% in the second quarter. On two-year revenue CAGR, both Marico and Dabur India Ltd are expected to outperform their peers.

Analysts at Jefferies say Nestle India Ltd may maintain double-digit growth despite the reduction in raw material inflation margins. The brokerage expects 8% year-on-year revenue growth for Britannia Industries Ltd, which will be largely value-based, even if volumes remain flat.

On the profitability front, sustained commodity inflation could reduce year-on-year gross margins, although sequential performance is likely to improve. Savings in advertising and promotional expenses can help net profit. Management comments on the overall demand situation, especially the rural market; Margin prospects and price movements are the major factors that track it.

Meanwhile, FMCG stock valuations have corrected from higher levels in view of demand concerns. Bloomberg data shows that the shares of HUL, Dabur India, Britannia and Marico trade at 52.8 times, 47 times, 45.4 times and 42 times, respectively, of their FY13 estimated earnings.

In the short term, the Omicron coronavirus variant has become a threat and some regions have imposed restrictions to prevent its spread. In general, analysts expect the FMCG sector to improve steadily till 2022, supported by the minimum possible constraints due to COVID-19.

“While we are seeing a COVID surge, the change in consumer behavior is no longer as dramatic as in the first two waves. The only impacts we are seeing are (1) HUL’s personal care business, which could see a slowdown again as consumer mobility falls, and (2) Dabur’s healthcare business, which could see strong consumption growth in this phase. is,” said credit analysts Suisse Securities (India) Pvt Ltd in a report last week.

How rural demand is shaped is important. Analysts said that unless there is a significant moderation in input prices, the pressure on gross margins will remain for some time. These factors may keep investors cautious on FMCG stocks in the near future. Analysts at Jefferies said that while Staples is facing a weak near-term earnings outlook, FY23 could be a year of turnaround.