HUL To Tata Consumer's Margins Stabilise But Volumes Stay Muted — Q4 Earnings Wrap

With fourth-quarter earnings almost over, the net profit of fast-moving consumer goods companies have ticked up, with many beating the consensus estimates. The overall trend suggests that makers of staples to soap are witnessing a faster recovery in margins as raw material prices ease. Volumes, however, are improving at a slower pace due to weak demand.

Consolidated net profits of companies like Nestle India Ltd., Hindustan Unilever Ltd., Bajaj Consumer Care Ltd., Marico Ltd., Britannia Industries Ltd., and Tata Consumer Products Ltd. have grown in double digits. But the results have been mixed in terms of sales growth and margin expansion.

India's largest consumer goods maker, Hindustan Unilever, recorded a slower pace of volume growth in the March quarter at 4%, compared with 5% a quarter ago. Even as price-led growth is moderating, the company expects volumes to recover gradually. HUL's outgoing Chief Executive Officer and Managing Director, Sanjiv Mehta, said during a post-earnings call that volume kickers will be visible only when commodity prices start deflating, prompting the soap-to-staple maker to increase grammages.

Volume growth continues to be weighed down by sluggish rural demand for the industry, owing to decadal high inflation and sparse rainfall in populous states. The declining rural volume trend reversed for the industry during the fourth quarter, according to Nielsen data. Rural volumes grew 0.3% in the fourth quarter, but they continue to lag urban growth of 5.3%.

The management of most companies, like Dabur and Hindustan Unilever, also indicated that volume-led growth will take its own time to reflect amid inflationary concerns and a reduction in pack quantity.

But not all companies have called out the persisting slowdown in rural consumption this time around. Two packaged goods makers — Nestle and Britannia —benefited due to their rural distribution expansion, fueling market share gains. Nestle, for instance, has posted its highest-ever quarterly sales growth in the last decade. Its volume growth, excluding the impact of Maggi small packs on the back of price increases, stood at 11%.

Nestle's sales growth in rural areas was volume-led.

Britannia Industries, on the other hand, saw market share gains of 1.4 times the overall market share gain in rural markets over FY21. During the year, it added 2,000 rural preferred dealers, bringing the total to 28,000.

Other than the familiar concerns about rural demand, such as consumers getting hit harder by inflation, shrinkage of low-unit packs, and, as a result, downtrading to cheaper and unbranded goods, the management of Dabur highlighted another issue. It said that stockists were finding it difficult to recover payments in rural areas, which is why they are not taking orders. This explains why companies with greater direct reach in rural areas are growing volumes while others that use the wholesale channel for reach are struggling.

Inflationary pressures and high inventory prices adversely affected margins in the nine months of the fiscal year ended March 2023.

To combat this, the companies undertook both price hikes and cost cutting, which helped limit compression.

However, in the last quarter, a large number of companies have recorded higher margins, with some beating analysts' estimates, primarily driven by easing raw material prices. Britannia Industries, Marico, Bajaj Consumer Care, and Tata Consumer Products have seen an expansion in margins over the previous year for the first time in the last five quarters.

Prices of Marico's key inputs like copra corrected 7% year-on-year, while rice bran and high-density polyethylene fell 22% and 2%, respectively.

The four commodities that form 60% of Britannia's inputs are flour, palm oil, laminates, and corrugated boxes. It benefited from the softening of palm oil prices by 14% year-on-year, lower prices of laminates by 9%, and lower prices of corrugated boxes by 16%. All these commodities, though, remain above Q1 FY21 levels. Other inputs like flour have seen prices inch up 21% in Q4 over the previous year. Besides, dairy has seen inflation of 54% with no respite in sight, and sugar remains inflated YoY but flat QoQ.

The company has already taken pricing action in the face of slightly higher competitive intensity to cover for near-term inflation spikes, besides expediting cost optimisation efforts to protect its operating margins.

The softening of refined mustard oil and light liquid paraffin oil prices has aided Bajaj Consumer's margin profile.

In the current fiscal, the top trends to watch for will be margin expansion as companies juggle between higher ad spends and inflation in select products, and recovery in volumes with rural demand seeing a gradual pick-up.

"We anticipate consumer companies to get back on track with improved margin profiles in the wake of the continued correction in raw material prices from peak," according to Nuvama Institutional Equities. Companies had axed ad spends to shore up Ebitda margins at a time when inflationary pressures weighed on trade. But now they may look to allocate 50–60% of the expanded margins towards promotions and advertisements, while the rest would flow towards margin expansion, according to the brokerage.

Nuvama expects rural demand to improve gradually in FY24, driven by a low base, softening inflation, a high flow of subsidies to rural regions in the run-up to general elections, expectations of a good harvest and monsoon, as well as modern trade and e-commerce picking up in tier 2 cities and beyond, which would help in faster penetration of premium products.

Besides, the mergers and acquisitions space also needs to be closely watched as companies begin to chase growth through the inorganic route.

Recently, Godrej Consumer acquired Raymond's consumer business, including Park Avenue, in a bid to expand its total addressable market.

Analysts, however, have raised concerns over its valuation given Raymond's smaller size and weaker operating margins.