FMCG Q2 Results Preview: Volume Uptick Remains Elusive, Margin To Expand Further

India's consumption story went awry during the July-September period, according to the quarterly business updates of the soaps-to-staples makers.

Companies such as Marico Ltd., Adani Wilmar Ltd., Dabur Ltd. and Godrej Consumer Products Ltd. indicated that the second quarter demand trends remained similar to the quarter ended June, resulting in muted volume growth—especially in the rural and bottom-of-pyramid segment, while the urban demand remained resilient.

A poor monsoon distribution due to the impact of El Nino and jump in food prices impeded the anticipated pick-up in demand recovery. Besides, the festive season has shifted entirely to the third quarter, resulting in lower offtake. For most companies, the international businesses are likely to outperform their respective India operations in constant currency terms.

"September has been better in terms of rains with a 13% surplus, but it has still not lifted the spending spirits in rural given shift in festival demand," said Abneesh Roy, executive director at Nuvama Institutional Equities.

Analysts will keenly watch out for commentary on rural recovery, given the volatile monsoon trend, increasing competition from the unorganised players as well as the tricky balance between volume push and margin recovery.

While FMCG consumption is showing a year-on-year improvement, the recovery has been gradual, Dabur said in an exchange filing.

The maker of Real fruit juice and Red toothpaste expects consolidated revenue to grow in the mid-to-high single digits. The healthcare and home and personal care segments are expected to grow in high single digits. “On account of mild summer and change in the festive season, we anticipate food and beverage business to remain slightly below last year’s revenue."

Analysts expect the FMCG companies to post modest single-digit volume growth, while revenue growth is expected to slow down further as pricing growth tapers off.

Volume growth for most would be in the 3-5% range, while revenue is expected to grow 6% in Q2 versus 8% in Q1, said Jefferies. In fact, the topline growth is likely to be the slowest in 12 quarters, the brokerage said.

Product categories such as hair oil and edible oil remain weak given high rural salience and downtrading, according to Nuvama Institutional Equities. Biscuits, soaps and detergents companies have seen the adverse impact of local players coming back, given commodity deflation.

Companies dealing in soaps, detergents, edible oil and hair oil such as Hindustan Unilever Ltd., Britannia Industries Ltd., Marico and Emami Ltd. have initiated price cuts, so their revenue growth would remain sub-5%, while others like Tata Consumer Products Ltd. and Nestle India Ltd. should still see double-digit revenue growth.

The consumer discretionary space is also expected to have another soft quarter with subdued demand in most categories other than jewellery and luggage. Apparel continues to see weakness at the mass end, according to analysts tracking the segment. Jewellery sales has been mixed with pick-up on softening gold prices despite delayed marriage, festive season and a high base, showed quarterly updates of Titan Co. and Kalyan Jewellers India Ltd.

Analysts expect the weak performance to continue from Page Industries Ltd., Aditya Birla Fashion and Retail Ltd. and V-Mart Retail Ltd. but project strong numbers from Trent Ltd. and Westlife Foodworld Ltd., and steady numbers from Raymond Ltd.

Avenue Supermarts Ltd. reported a smart recovery in second quarter margin even as the DMart hypermarket chain operator's profitability was impacted due to lower contribution from its high-margin apparel business.

The quick service restaurants sector is expected to report subdued numbers as demand remains under pressure, while margin were hurt due to food inflation and growing competitive intensity.

Paint players, excluding Indigo Paints Ltd., are likely to post muted volume of sub-5% but are projected to achieve double-digit Ebitda growth.

Asian Paints Ltd. is expected to lead with an impressive 40.5% growth in Ebitda. Indigo Paints would continue to outperform with 2–3 times industry growth due to irregular monsoon and shift of festive demand to Q3. The paint and adhesive players are likely to record significant margin expansion over the previous year off a subdued base.

Nuvama expects the volume growth of alco-beverage makers to be weaker than the first quarter due to Karnataka price hikes and festival shift. For instance, the brokerage expects United Spirits Ltd. to report a volume growth of 3%. It also expects the revenue and Ebitda to decline 9% and 4.5%, respectively, year-on-year during the second quarter due to a high base.

Most companies, however, are expected to see margin recovery, albeit at a slower pace. Correction in raw materials such as copra, edible oil, palm oil and packaging costs are expected to aid gross margin. But the second quarter would see further ramp-up in ad spends, partly due to increase in competitive intensity. This would restrict operating margin expansion, analysts said.

Ebitda margin is expected to expand 130 basis points year-on-year. Ebitda growth is expected to be 13% year-on-year, with notably strong outcome for Nestle India, Godrej Consumer Products Ltd., Colgate Palmolive India Ltd. and Tata Consumer Products, which were more impacted by inflation last year, according to Jefferies.

India $110-billion fast-moving consumer goods industry is pinning its hopes on the third quarter for a demand recovery, driven by a potential hike in the minimum support price, lower inflation and festival-driven sentiment.

"The trajectory on rural demand would be the key monitorable going forward, especially with some push expected from the government given the upcoming elections," according to a note from Systematix Institutional Equities. The brokerage expects above-trend results from Nestle, Godrej Consumer and Tata Consumer, and soft results from HUL and Britannia.