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Commodity inflation pressurises margins…

The FMCG sector witnessed a high growth quarter on the back of lower sales in the base quarter, which was marred by country wise strict lockdown. Though Q1FY22 also witnessed the adverse impact of a second Covid-19 wave & subsequent state wise lockdowns, the impact on supply chain was minimal with industry, government & trade channel’s preparedness.

Similar to previous lockdowns, consumption of some discretionary & out of home categories were adversely impacted. We believe detergent, cosmetics, skin care products, juices, carbonated drinks would have seen muted sales during the quarter.

On the other hand, packaged foods, edible oil, nutrition, immunity products would have continued the strong growth momentum. Our FMCG coverage universe is likely to see 24.1% revenue growth. With the sharp increase in many commodity prices, most companies have taken price hikes to the tune of 5-20% in the last six months. We believe element of price hikes in revenue growth is higher than usual in Q1FY22. After the one full year of aggressive new launches, the pace of new product development has de-accelerated.

However, new products would continue to contribute 2-4% to the topline for FMCG companies. Within our coverage universe, Dabur, HUL, Nestlé & Zydus Wellness are likely to see strong 15- 25% sales growth on the back of steep sales decline in base quarter. Marico is likely to grow 28.5% on the back of strong growth in Saffola & foods segment. Saffola & foods portfolio of Marico has been growing at a fast pace in the last five quarters.

We believe the growth momentum would continue led by consumption shift from loose to packaged foods & acceleration in adoption of healthier foods habits. Cigarettes sales for ITC & VST Industries may see strong growth on the back of beleaguered corresponding quarter.

High commodity prices; limited scope to curb margin fall

Our coverage universe is likely to witness 40 bps operating margins contraction but ex-ITC, margins are likely to fall 240 bps. The quarter has seen a steep increase in commodities costs with Palm Oil, Copra & crude prices risen sharply.

On a YoY basis, average palm oil & crude prices were 2x & copra prices were up 20%. Though palm oil & copra prices started cooling off in May-2021, the impact of the decline would not bring immediate relief. In previous quarter, Nestlé & Zydus benefited from lower milk prices given these companies were holding low cost skimmed milk powder (SMP) inventories.

Favourable sorbitol prices would continue to benefit margins for Colgate. However, increasing milk prices would entail price hikes, going forward. We believe scope for cutting overhead & marketing spends remains limited for FMCG companies on the back of consistent cost rationalisation throughout the FY21. We expect net profit to witness growth of 17.9% during the quarter.

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