FMCG Sector Poised for Volume Uptick and Improved Margins in March Quarter: Analysis

With commodities prices moderated in recent months, certain Fast-Moving Consumer Goods (FMCG) companies are projected to report an increase in volumes in the March quarter. According to economists, rural demand remained subdued in comparison to urban consumption during the quarter.

According to an ICICI Direct research, the softening of main commodity prices, price cuts by several FMCG businesses, and grammage increases are projected to result in a volume growth in Q4 FY23.

"We anticipate 9.8 percent revenue growth in our FMCG coverage universe in Q4FY23, driven by volume and pricing mix. HUL's price reduction in the beauty and personal care (BPC) sector have begun to boost the volume increase. Furthermore, the home care segment has been rising at a faster rate over the last year, owing mostly to higher mobility in the post-Covid period," according to the survey.

It went on to say that the drop in commodity prices is projected to boost FMCG companies' gross margins. "Average palm oil, crude oil, and coconut oil prices have fallen 35%, 16.1%, and 12.7%, respectively, compared to the previous quarter." Wheat prices have fallen to 21/kg from a high of 30/kg in December 2022. However, milk prices not only stayed stable, but actually increased in the fourth quarter, according to the ICICI Securities research.

However, rural demand has been subdued in comparison to metropolitan demand. Dabur India said in a recent BSE filing that it has experienced sequential improvement in demand trajectory across urban and rural markets in the March quarter, while it falls short of a full recovery. "While urban markets have returned to positive volume growth, rural markets remain subdued," the FMCG conglomerate stated. It also stated that it has observed the sprouting of green shoots as a result of moderated inflation, improved consumer confidence, and increased government expenditure.

According to a recent research by Nuvama Institutional Equities, the margin profiles of some FMCG businesses have begun to improve year on year. "As gross margins increase, companies have begun to increase ad spending." Urban areas will continue to outperform rural areas. As a result, players with greater exposure to rural are more likely to turn in a subpar performance," according to the findings.

Marico stated in its recent BSE report on Q4 results that the sector is continuing to recover gradually, "with year-on-year volume trends improving in each quarter." "Among key inputs, copra prices remained stable in a favourable range, edible oils resumed their downward trend, and crude derivatives remained firm." As a result of a declining RM basket and improved portfolio mix, gross margin is expected to expand and deliver decent year-on-year growth in operating profit.