All eyes are on rural demand in FMCG companies’ third-quarter results

Hindustan Unilever Ltd (HUL) will announce its December quarter (Q3FY22) results on Thursday and investors are expected to closely watch management’s comments on rural demand. Recall that when announcing second quarter results, HUL said recent industry trends point to a moderation in rural demand, which needs to be monitored.

Third-quarter volume growth expectations are sequentially lower, but product price increases would likely support revenue growth. “Expect revenue growth of 9% (for HUL), which would be driven by pricing with volume growth lagging 2%,” said analysts at Jefferies India Pvt. ltd.

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Growth moderation (Mint)

As other fast moving consumer goods (FMCG) companies report their third quarter results, investors can expect a similar theme of moderate volume growth and higher prices to play out. Overall industry revenue growth is expected to be weaker sequentially. “HPC & Foods (FMCG businesses) volume growth rates have noticeably slowed (JM Financial estimates 1-2% vs. raw material costs,” the analysts said. at JM Financial Institutional Securities Ltd. “Although this leads to a deceleration in revenue growth in commodities, the two-year CAGR may not be too different from (Q2) due to a higher price component,” the statement said. brokerage house. CAGR is the compound annual growth rate.

Marico Ltd is expected to be one of the top performers when it comes to revenue growth. In its pre-quarter update, it said consolidated revenue growth in the third quarter was in the 1930s. Marico’s domestic volumes for the December quarter are expected to be flat year over year. other (year-on-year) compared to 8% growth in the second quarter. On the two-year revenue CAGR, Marico and Dabur India Ltd are expected to perform relatively better than their peers.

Jefferies analysts say Nestle India Ltd could maintain double-digit growth even as commodity inflation squeezes margins. The brokerage expects revenue growth of 8% year-on-year for Britannia Industries Ltd, which would be largely influenced by prices, even if volumes remain stable.

On the profitability front, continued commodity inflation could squeeze year-over-year gross margins, although sequential performance should improve. Savings on advertising and promotion expenses can contribute to the bottom line. Overall management feedback on demand conditions, especially rural market; margin prospects and price increases are key factors to watch.

Meanwhile, FMCG stock valuations have corrected from their highs on demand concerns. Bloomberg data shows shares of HUL, Dabur India, Britannia and Marico are trading at 52.8 times, 47 times, 45.4 times and 42 times each of their estimated FY23 earnings, respectively.

In the short term, the Omicron coronavirus variant poses a threat and some regions have imposed curbs to contain its spread. In general, analysts expect the FMCG sector to experience a steady recovery in 2022, supported by minimal potential headwinds from covid-19.

“As we see a surge of covid, changes in consumer behavior are no longer as dramatic as in the first two waves. The only impact we see is with (1) HUL’s personal care business, which could again experience a slowdown as consumer mobility falls, and (2) Dabur’s healthcare business, which could experience strong consumer growth in this phase,” said analysts at Credit Suisse Securities (India ) Pvt. Ltd in a report last week.

The evolution of rural demand remains essential. Gross margin pressures would continue for some time until input prices come down significantly, analysts said. These factors could make investors cautious about FMCG stocks in the near future. “As core businesses face a weak near-term earnings outlook, Fiscal 23 could be a turnaround year,” Jefferies analysts said.

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