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Given the weak winter and slow recovery in rural demand, Q3FY24 is likely to be lackluster for FMCG plays, from the topline viewpoint. We expect competition from small players in select categories to ebb, as large players have embarked on corrective measures. The international show is likely to be better, on a constant currency basis, though currency will limit reported growth. Gross margin is likely to expand YoY, but EBITDA margin expansion would be limited due to weak operating leverage and higher A&P spends. In India business, we see a low-to-mid single-digit volume growth. Overall, in our coverage, Colgate is likely to report better results (sales/earnings growth at 7%/21%), while HUL (sales/earnings growth at 3%/1%) and GCPL (sales/earnings growth at +1%/-1%) would be the weakest. Dabur (+9%, sales driven) and Marico (+10%, margin driven) are likely to clock better earnings growth. Our report highlights the rollover of our TP to Dec-24 from Sep-24 earlier. We downgrade our rating for Britannia to REDUCE (from Add) and GCPL to ADD (from Buy). We prefer Dabur, ITC, and Emami, while avoiding Colgate.

Q3FY24 to see growth moderation; expect a rebound in growth in FY25

From the domestic perspective, demand for winter-centric products has been subdued due to a weak winter — growth is primarily a factor of robust placement of products with trade in October, but tertiary sales have not revived, given a frail winter. Rural demand is lackluster, with moderate improvement. Regarding competitive intensity, companies are now coming into action with focus on LUP packs and better incentives for trade (push gained perspective). Organic domestic volume growth is likely to be in a low-to-mid single digit. Price growth for most has turned negligible, but would remain strong at ~7% for Colgate. From the International perspective, constant currency growth is likely to be in a mid-single to a low double-digit, but reported growth would be muted, given currency headwinds. Demand recovery outlook looks grim in the near term. With Elections and expectations of a better summer, players are now hopeful of demand recovery in FY25.

Margin driven earnings delivery play to be limited to some; topline revival key

We see the gross margin build-up sustaining, but interim surge in crude in Q2 is likely to have a bearing on QoQ recovery. With focus on reviving category development thrust, FMCG players are looking to revert to historical A&P spends. This, along with weak operating leverage, is likely to limit EBITDA margin delivery. We see better EBITDA margin for GCPL, Colgate and Marico, while margin expansion for ITC, HUL, Britannia, Dabur and Emami would be muted. On better margin, Colgate/Marico are likely to log double digit earnings, while margin delivery for GCPL would be absorbed in higher taxes.

Valuations factor in long-term prospects; downgrading Britannia and GCPL

Our positive stance for Britannia and GCPL has gradually been factored into the stock price. With limited upside, we downgrade our rating for Britannia to REDUCE from Add and for GCPL to ADD from Buy. Factoring in the demand weakness in H2FY23, our earnings see low single-digit cuts. We revise our target valuation multiple (P/E) up for GCPL to 50x from 46x and for Emami to 33x from 31x. We maintain BUY for DABUR, ITC, and Emami and SELL for Colgate.

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