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Steady demand; gradual volume improvement

MOFSL coverage universe to clock 7.8%/9.2% YoY growth in revenue/EBITDA Demand trends were steady in 1QFY25, with the summer portfolio likely to outperform. Rural markets have seen a gradual recovery (rural growth was better than urban) during the quarter. Most company managements remain positive about volume recovery in FY25. All eyes are on the govt’s initiatives to boost rural income in the upcoming budget. Companies have been focusing on driving their core portfolios through various initiatives, like distribution expansion, product relaunches, step-up in marketing budgets, etc. We expect marginal improvements in volume growth QoQ in 1QFY25. Considering steady macro, price cuts and consumer offers by companies, we expect that our FMCG universe is likely to post mid to high single-digit volume growth in FY25. Paints and adhesive companies are expected to report high single-digit to doubledigit volume growth. The cigarette segment is seeing a slight improvement in demand and is expected to deliver ~2-3% volume growth. Alcohol beverages were affected by election-related restrictions and there are some supply-side constraints limiting the sales. We expect volume growth of 4% in UNSP and 11% in UBBL. We are seeing select price hikes (HPC categories); hence, we believe that revenue growth could be slightly higher than volume growth for a few companies. Gross margin is expected to see some improvement, albeit at a slower pace than witnessed over the last 3-4 quarters. Overhead expenses related to distribution and marketing are expected to remain elevated. Still, we expect some improvement in EBITDA margin for most companies in our universe. The 19 companies under our coverage are expected to deliver revenue growth of 7.8%, EBITDA growth of 9.2%, and PAT growth of 9.7% in 1QFY25.

Stable price trends in commodities with gold continuing to rise

Overall commodity cost basket: The overall commodity cost basket has stabilized during the quarter, up 1.7% YoY and 1.5% QoQ. The agricultural basket increased by 3.6% YoY/3.1% QoQ. There was a decrease in prices of mentha and milk powder, whereas prices of palm oil, sugar, wheat, tea, coffee and maize increased. The nonagricultural commodity basket declined 2.0% YoY/1.7% QoQ, offsetting the rise in agri commodity prices.

* In the agricultural basket, maize prices went up by 17% YoY and currently trade at INR24/kg. Coffee prices continued to rise by 15% YoY (2% QoQ) due to labor shortages and higher demand. Tea prices increased sharply during the quarter after a moderation in 4QFY24 and went up by 31% QoQ/4% YoY due to geopolitical issues, climate change and changing consumer preferences. Wheat prices rose 10% YoY to INR26/kg, aided by government support to farmers. Barley prices remained flat YoY at INR21/kg. Sugar prices increased by 8% YoY to INR39/kg. Mentha oil prices dropped 14% YoY to INR975/kg. Malaysian palm oil prices increased by 5% YoY to MYR4,097/MT. Palm fatty acid prices rose 6% YoY; now trading at USD840/MT.

* In the non-agricultural basket, crude oil prices went up by 8% YoY and 2% QoQ in 1QFY25. Currently, spot price is ~USD89/bbl. VAM prices declined 2% YoY and 15% QoQ and reached to USD850/MT. Domestic gold prices increased by 20% YoY and 14% QoQ in 1QFY25, and currently trade at INR71,850 per 10gm. Titanium dioxide (TiO2) prices declined by 13% YoY and 1% QoQ; now trading at INR343/kg

1QFY25 – Expected key outliers and underperformers

* Outliers: Emami, GCPL, Britannia, UBBL

* Underperformers: Asian Paints, HUL

Top picks

* HUL: We believe that volume growth has bottomed out and that a gradual volume recovery is expected in FY25. HUL’s wide product range and presence across price segments should help the company achieve steady growth during the recovery period. Parts of the BPC and F&R have a turnaround scope; we will see how the new CEO addresses the gaps. The valuation at 47x FY26E EPS is reasonable given its last five-year average P/E of 60x on one-year forward earnings.

* GCPL: GCPL is consistently working to expand the total addressable market for its India business through product innovations to drive frequency. Besides, there has been a consistent effort to address the gaps in profitability and growth in its international business. We see margin headroom from the RCCL and Indonesia businesses. The valuation is expensive, but earnings are expected to outperform peers’.

* DABUR: Recovery in rural markets should support its portfolio, as it is heavily skewed toward rural areas. In the domestic business, we expect healthcare, oral care, and food business to grow faster than others. The distribution drive will further contribute to rural growth. EBITDA margin has remained in the range of 19-20% for the past several years. The margin is expected to improve in the coming years due to a better mix of products (such as higher healthcare offerings) and increased pricing in high market-share brands.

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