FMCG makers expect sustained recovery in volume and margins with price reduction in FY24

Encouraged by volume growth, margin improvement, and recovery in rural sales, India's top fast-moving consumer goods (FMCG) companies are now back to their normal growth cycle as they step up investments as well as spending on advertising and marketing.

FMCG companies are chasing volume growth again after a gap of a few quarters, offering higher grammage and price cuts thanks to inflationary pressures softening on key raw materials for everything from soaps to food items.

Hindustan Unilever (HUL), Dabur, Marico, Godrej Consumer Products, ITC, Tata Consumer Products and Nestle reported volume recovery in the March quarter and said they expect a gradual pickup in consumption in FY24.

"The prospects of a sustained recovery have strengthened. After five quarters of volume decline, the sector has posted volume growth," Marico MD and CEO Saugata Gupta said in the company's earnings conference call. "Urban consumption has been steady while rural is showing some convincing signs of having bottomed out."

Foods continue to drive growth for the sector, while the home and personal care segment also entered positive territory after an extended slowdown.

Marico, which owns popular brands like Saffola, Parachute, and Livon, reported an 18.7% increase in its consolidated net profit to Rs 305 crore for the fourth quarter ended March 2023 while sales rose 3.65% to Rs 2,240 crore, driven by single-digit volume growth and moderation in commodity prices.

HUL said rural areas have shown improvement with higher value growth sequentially. While HUL's volumes continue to fall, the extent of decline has reduced versus last quarter.

"The slowdown in the FMCG market is bottoming out. This improvement was led by volumes, which have turned flat in this quarter, versus a mid-single-digit decline in the December quarter," said HUL CFO Ritesh Tiwari in its earnings call.

The makers of popular brands such as Rin, Lux, Surf Excel and Pond's said it expects the price-volume growth to rebalance further. "We expect volumes to recover gradually due to high levels of cumulative inflation and the fact that consumption habits typically recover with a lag," he said.

For the March quarter, HUL reported an increase of 12.74% in its consolidated net profit to Rs 2,601 crore. Net sales rose 10.83% to Rs 14,926 crore.

However, HUL warned the near-term operating environment is likely to remain volatile due to global slowdown risk and uncertainty related to weather phenomena like El Nino and heatwaves.

Abneesh Roy, Nuvama Group Executive Director for Institutional Equities, said the outlook for the FMCG industry was "positive" with volume growth and improvement in margins for most companies in FY24.

"As raw material prices are cooling off, companies shall start paring prices via grammage increase or gradual price reductions. Price growth shall ease while volume growth will improve," he said.

Roy also cautioned about the impact of El Nino and the "aggression" from billionaire Mukesh Ambani-led Reliance Industries Ltd, a known disrupter, which aims to be a big player in the $110-billion FMCG segment.

Meanwhile, Godrej Consumer reported an 11.47% increase in its India revenue to Rs 1,822.92 crore in the March quarter. This was led by volume growth of 11%. Its home care segment, which consists of household insecticides and air fresheners, grew 14% and 17%, respectively.

"We expect to build on the current momentum and deliver volume-led growth along with upfront marketing investments and improvement in profitability," said its Managing Director and CEO Sudhir Sitapati.

Britannia Executive Vice-Chairman and Managing Director Varun Berry also expressed optimism. "Volume growth will be certainly much better than this year," he said.

On commodity prices, Berry said there is deflation in prices of palm oil, laminates and corrugated material for packing but flour and milk prices are soaring. "There are certain brands and certain packs where we have already initiated price reductions or promotions," he said.

In the March quarter, Britannia reported a 47.53% jump in consolidated net profit to Rs 557.60 crore. Its revenue from operations rose 10.93% to Rs 3,892.02.

Similarly, Dabur reported volume growth of 11% during the March quarter and 14% for FY23. Its quarterly net profit was Rs 292.76 crore and revenue from operations stood at Rs 2,677.8 crore.

"Despite near-term concerns around inflationary pressures, we plan to accelerate the growth momentum by continuing to invest in brand building, innovation, and capabilities that will drive growth," said Dabur India CEO Mohit Malhotra.

Other companies also recorded growth. ITC's revenue from the FMCG segment rose 19.34% to Rs 4,951.17 crore from Rs 4,148.62 crore while EBITDA jumped 76%.

Nestle, the maker of Maggi, Kitkat and Nescafe, reported an increase of 24.69% in its net profit to Rs 736.64 crore in the March quarter. Sales rose 20.43% to Rs 4,808.40 crore.

Tata Consumer reported a 21.12% rise in its consolidated net profit to Rs 289.56 crore. Its revenue from operations was up 13.96% at Rs 3,618.73 crore.

Tata Consumer said it recorded growth in the India beverages business and food. It had a "strong margin growth and strong topline growth driven both by volume and price," the company said in its earnings call.

"We have started seeing volume growth coming back. The impact of inflation and monetary tightening on economic growth and demand seems to be slowing down, but I would keep my fingers crossed and monitor it closely," said Tata Consumer MD and CEO Sunil D'Souza. "In the near term, we are seeing stability."