Published on 28/10/2021 12:56:22 PM | Source: ICICI Direct

FMCG Sector Update - Growth aided by price hikes; margins still under check By ICICI Direct

Posted in Broking Firm Views - Sector Report| #FMCG #Sector Report #ICICI Direct

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Growth aided by price hikes; margins still under check

Q2FY22 has seen normalisation of the consumption trend after a recovery from the second wave of pandemic. We believe FMCG companies would continue to witness structural mid to high single digit volume growth. Most companies have taken 5-15% price hikes in previous quarters to withstand commodity price inflation.

Our coverage universe is expected to witness 13.7% revenue growth led by equal mix of volumes & pricing growth. Dabur, Marico would continue to witness strong volume growth led by foray into newer categories, higher traction of immunity products & healthier consumption trend. Marico sales would also be driven by higher pricing growth. HUL is likely to witness a strong recovery in both home care & BPC categories from low base quarter. Moreover, acquired nutrition brands would continue to grow at a healthier pace for the company driven by smaller SKUs & distribution expansion.

Colgate & Nestlé will continue to grow at a moderate pace driven largely by volumes. Tata Consumer is expected to continue to witness strong sales growth led by sharp price hikes taken in the last one year to pass on a steep rise in procurement prices. Tea procurement prices have witnessed more than 30% decline in the last two months, which would ease pressure on prices. Zydus Wellness is expected to see a recovery from low base quarter with 12% growth in a non-peak quarter.

Cigarettes companies are expected to see a strong recovery in cigarettes segment on YoY as well as QoQ basis. We believe cigarette companies would see 5-7% volume growth in Q2. We believe structural trend in FMCG sector i.e. direct distribution expansion, ecommerce channel sales growth, consumption shift towards packaged foods & new products launches would continue to drive growth in the medium term for the industry. With expected moderation in commodity price inflation in next two quarters, the industry would increase its advertisement spends to drive growth from newer products.


Commodity inflation to pressurise margins in near term

Our coverage universe is likely to witness a 15 bps contraction in operating margins but ex-ITC it is likely to contract by 80 bps. Most commodities have remained elevated in the last three months pressurising FMCG companies to take prices hike & reduce advertisement spends. Average palm oil prices are up 60% YoY and 6% QoQ.

Similarly, average crude prices have increased by 68% YoY and 6% QoQ. Copra prices have been flat YoY but cooled off by 22% from the peak in March 2021. Tea prices have also declined ~30% in last two months. Despite price hikes, we believe operating margins of HUL, Dabur, Marico, Nestlé would be under pressure. We believe FMCG companies would be able to pass on this inflation with staggered price hikes or dip in commodity prices in next few quarters. We estimate net profit growth of 13.4% in Q2FY22.


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