Economy

FMCG majors expect to report ‘strong’ Q2

Abhishek Law Kolkata | Updated on October 19, 2021

Rural demand resilient, improvement seen in modern trade across urban markets

FMCG majors are expected to report a set of strong Q2 numbers with rural demand remaining resilient, good kharif crops and progressive improvement in modern trade across urban markets. Out-of-home consumption and sales of discretionary items have picked up, but it is yet to reach the pre-Covid levels.

Cigarette volumes are expected to improve on a softer base (of Q2 FY21). However, companies could face margin pressure because of rising raw material costs, say analysts tracking the sector.

“In Q2 FY22, rural demand remained resilient, while urban demand, including modern trade, is starting to recover. Discretionary and out-of-home segments are showing good pick-up, but it is not yet back to the 2019 levels. The health and hygiene segment is likely to slow down,” said analyst firm Edelweiss in a report, adding that demand sentiment is likely to improve in Q3 on the back of festival demand.

Godrej Consumer Products, in a stock market notification, had previously said that it expected “close to double-digit sales growth”, while broad-based sales growth was witnessed in the home care and personal care categories.

“Since rural markets have remained resilient on the back of a strong kharif crop, good rabi sowing, and the monsoons ahead of their long-period averages, staples’ demand is also likely to be healthy,” said Motilal Oswal in its report, adding that as vaccination continues and daily case numbers remain subdued, “discretionary companies are set to witness continued demand momentum”. “Q2 FY22 is likely to report strong cumulative growth numbers, 15 per cent on the topline, 10 per cent on EBITDA, and 10 per cent on PAT,” it said, referring to the companies it tracks.

According to the firm, “a large portion of growth is likely to come from pent-up demand for discretionary items”.

Out-of-home categories

With rising mobility, discretionary categories such as skin care, cosmetics, hair colour and juices are witnessing an uptick, while liquor and cigarettes may show good year-on-year growth on a soft base.

Analysts claim that cigarette volumes for ITC are expected to witness growth in the 10-12 per cent range over the same period last fiscal (Q2 FY21). Profitability pressures are likely to ease due to recovery in the high-margin cigarettes business as well as improved performance in the hotels business, Motilal Oswal added.

Health supplements (honey and Chyawanprash), hygiene products and premium edible oil could see some slow down.

Raw material costs

Although companies took price hikes in raw material costs and passed on a portion of it following improvement in demand, analysts say gross margins are likely to remain under pressure. Significant improvement is likely only in Q3 FY22.

Edelweiss V-P, Abneesh Roy, pointed out that he expects a year-on-year dip in gross margins for most companies.

According to Edelweiss’ report, HUL has taken one more calibrated hike in Q2 in the skin care and laundry segments. Most other staples companies have also taken calibrated price hikes. Paint companies have taken an additional 2 per cent price hike, taking their total annual price hike to 6 per cent.

The prices of raw materials of crude derivatives, which affect packaging / hair oil companies, have also seen an increase of 22-33 per cent year-on-year. Palm oil prices were on the higher side, while that of barley and wheat prices rose sequentially.

“In addition to gross margin pressure, higher ad spends year-on-year have resulted in estimated cumulative EBITDA growth of 10 per cent. The EBITDA margins are expected to decline or remain flat for almost all companies in our coverage universe,” said Motilal Oswal.

Published on October 18, 2021

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