FMCG Q1 Results Preview: Elections, Heatwave Hurt Demand But Rural Uptick Shows Promise

The April-June quarter is likely to be a mixed show with the combination of extreme heat and general elections having affected the makers of soaps-to-staples disproportionately, even as they're seeing nascent signs of revival in rural demand that could partially offset the impact.

"The quarter saw sequential improvement in demand trends with rural growth picking up," said Dabur India Ltd. in its quarterly business update on Friday.

The Real fruit juice maker expects to report "mid-to-high single digit" growth in consolidated revenue, with the domestic business registering "mid-single digit" volume growth.

"This [fiscal] year started on a positive note as demand trends continued to exhibit gradual improvement on expected lines," according to Marico Ltd. Its domestic business posted a modest uptick in underlying volume growth on a sequential basis.

Broadly, the consumer goods companies are expected to report mid-single digit topline growth driven by volumes, with pricing likely to experience a low-single digit decline to low-single digit growth. With raw material price growth in the base and pass-through of price benefit in select categories, gross margin expansion for companies is anticipated to be restrained. This, along with higher advertising spends, will limit Ebitda margin expansion.

The volume growth is expected to range from low to mid-single digits.

Manufacturers of impulse packaged snacks and beverages are expected to report weaker-than-expected earnings growth as harsh weather caused a fall in out-of-home consumption and travel.

The hot weather also impacted categories like tea and coffee, and sales of household insecticides was affected by the delayed arrival of monsoon. However, companies selling ice creams, colas and other cold beverages, sunscreens, talcum powder and cooling hair oils are expected to buck the trend and report business growth as their products flew off the shelves during the summer months.

"We were running at close to 100% in April," said Ravi Jaipuria, chairman, Varun Beverages Ltd., indicating that the summer started well. "We think we should have a good quarter."

In its quarterly preview report for the three-month period on the consumer sector, Nuvama Institutional Equities noted that the largest bottlers of foods and beverages company PepsiCo India may see a 25-30% increase in volume, benefitting from a favourable base, extreme heat, political rallies and enhanced production capacities.

The brokerage noted that Emami Ltd. saw "strong double-digit growth" in talcum powder during the quarter, while Dabur India Ltd.'s fruit juice business had a soft quarter as against initial expectations, with likely 5% sales growth in the category due to unexpectedly high temperatures keeping people indoors. It also expects Hindustan Unilever Ltd., Tata Consumer Products Ltd. and Nestle India Ltd.'s hot beverages portfolio to be "adversely impacted" by strong summers and a strong base, even as HUL's ice-cream category could turn in "strong double-digit growth".

Adani Wilmar, in its quarterly update, acknowledged there was decreased out-of-home consumption and seasonal dips in summer demand. Yet, the company's food & FMCG business volume grew by 23% over last year. The company's edible oil volume for the quarter increased 13% year-on-year, while the sales value for the segment jumped 10% year-on-year.

Elections-led supply-side restrictions and higher number of dry days impacted alcohol beverage sales, according to industry executives, who spoke on the condition of anonymity citing the silent period before the earnings season.

"Beer was expected to fare strongly in summer, but election-related restrictions may impact United Breweries Ltd.'s Q1 volume," Nuvama said.

Moreover, the suspension of government contracts due to the implementation of the election code is likely to impact paints and adhesives companies. "There is some postponement of demand in view of the projects business which is taking place, which would kind of come in June and July," Amit Syngle, chief executive officer of Asian Paints, told investors in May.

Despite these challenges, the continued gradual uptick in rural consumption offers relief to FMCG companies. While trends so far are largely similar to that of the previous quarter, the sector awaits demand recovery with the hope of a better monsoon aiding rural economy and expectations of a pro-consumption full budget.

"With forecast of a normal monsoon and continued focus by the government on macro-economic growth, we expect the improvement [in rural growth] to accelerate in the coming months," Dabur said.

Nitin Gupta, an analyst at Emkay Global Financial Services, expects the full effect of tailwinds to be felt in the second half of the ongoing fiscal when growth will recover.

The humungous April-June quarter 2023 will continue to keep the Q1 FY25 growth in check, because of the base effect, according to K Ramakrishnan, managing director, South Asia, Worldpanel division, at Kantar. "A bright star in this year is the resurgence of the rural market and we expect growth in rural to outpace that of urban for the rest of the year."