IGI Logo

FMCG companies put up a low-key show on the topline front in Q1FY24, where pricing growth anniversarized and volume growth was lackluster (sector volume growth stood at 7.5%, but only 0-4% for our coverage companies, except GCPL that saw 12% growth). However, from the margin perspective, there has been healthy recovery, driven by easing in raw-material costs. Earnings delivery was relatively better, with improvement in margins. Going ahead, companies would strive for growth in volume over margin. We believe rational competition would be key for structural recovery and earnings growth. We remain positive on GCPL, ITC and Britannia, while avoiding Colgate.

Domestic business structural recovery key

Amid the deflationary raw-material setting, market-share gain arrested for large FMCG companies in Q1FY24. Small domestic players are fast bouncing back (reflected in the better industry volume growth), benefitting from easing in raw-material prices and the low base. Segment-wise, Foods & Beverages saw relatively better growth than HPC. Overall, sector value-sales growth stood at 12.2%, with 7.5% volume growth, as per AC Nielsen data. Within our coverage, only GCPL reported better volume growth (at 12%), with all other players reporting a mere flat-to-4% growth (refer to Exhibit 1).

Rural recovery positive; sustenance of urban momentum crucial

Sectoral demand in Rural continues to improve on a low base, but recovery for large FMCG incumbents is subdued. As per AC Nielsen data, growth stood at 4% in Q1FY24 vs flat YoY volume growth in Q4FY23. Going ahead, recovery in Rural demand is positive, where large players are looking to improve growth on the back of accelerated distribution expansion. Comparatively, Urban growth remains robust, at double-digits. FMCG companies have been clocking better growth in modern retail channels, wherein revenue concentration is 14% (Colgate)-29% (Marico) of sales (refer to Exhibit 21).

Gross-margin recovery aids A&P spend

On the back of healthy easing in raw-material prices, large FMCG players have been focusing on recovering the gross-margin profile. Intent is to retrace the historical grossmargin levels with recovery in volume. However, EBITDA margin recovery could be hampered, given the need for higher A&P spends, which stood curtailed for the last couple of years. As regards product pricing, we see volatility in prices and the macro setting, which will induce companies to rely on increased consumer promotions vs MRP cuts. In Q1FY24, companies passing-on the raw material price-cuts led to chaos in trade, where supply chain has done inventory down-stocking (particularly in HUL and Marico)

Valuation to follow execution; we prefer GCPL, ITC and Britannia

The FMCG sector’s one-year forward valuation is 52x PER, which is at a ~5% discount to the 5-year historical average forward PER. Relative to the broader market index Sensex, the FMCG sector valuation is at a premium of ~200%. We believe rational competition would be crucial for driving double-digit earnings, which would aid valuations. Within our universe, we continue to favor ITC, Britannia and GCPL (BUY on all three), on the back of strong fundamentals and better execution. We maintain SELL on Colgate. We have HOLD rating on Hindustan Unilever and Marico.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf &

SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer