Q2 FMCG Results Preview: Two Encouraging Consumption Trends
From toothpaste to ready-to-eat snacks, consumption in rural households outpaced their urban counterparts, helping boost demand in the quarter ended September. And demand for pricier packs is also rising.
Two signs that normal consumption behaviour is returning after the pandemic-led upheaval.
Demand for consumer goods rose 58.2% year-on-year in India’s hinterland, data compiled by the business intelligence provider Bizom showed. That's more than twice the rate of urban consumption.
The company attributed the trend to a normal rainfall and an uptick in the rural job market, revival in demand for workforce in factories and infrastructure.
A steep growth in the number of active kirana, or neighbourhood grocery stores, helped. The number of such outlets now operational rose 2.44 times over a year earlier, said the company that transacts with about 7.5 million retail stores across India.
“Year-on-year FMCG growth continues to be powered strongly by rural areas. Even month-on-month comparison shows that rural growth has outpaced urban growth driven by stronger stocking across the kiranas,” Akshay D'Souza, chief of growth and insights at Mobisy Technologies Pvt., which owns Bizom, told BloombergQuint. “While rural has seen a growth of 1.9% in September over August, urban contracted 1.8%.”
After taking a massive hit during the lockdown quarter of April-June 2020, when businesses faced challenges like closures and shortage of workers, the Rs 4.5-lakh-crore fast-moving consumer goods industry was largely immune to the Covid-19 pandemic’s second wave. The manufacturers were well prepared this time, consumers didn’t panic and lockdowns were imposed in a phased manner. According to Nielsen data, the sector grew 37% in the quarter ended June.
Most large manufacturers including Hindustan Unilever Ltd., ITC Ltd., Nestle India Ltd. and Dabur India Ltd. also avoided passing on the steep rise in raw material costs to consumers. Still, overall prices of packaged goods rose 5.8% during the quarter under review, Nielsen said.
Systematix Institutional Research expects demand to rise in the third quarter of the ongoing financial year but raw material prices remain a key headwind.
“Rural demand should remain strong driven by a normal monsoon and strong Kharif harvesting while urban markets will also see a sequential recovery due to improved mobility in the second quarter of FY22,” it said in a recent note. “Balancing volume growth and price hikes will be a key challenge, especially for consumer staples firms as they try to mitigate the impact of sharp inflation in raw material prices.”
Higher prices of edible oils, metals and crude oil in the international markets may pressure domestic retail inflation. The pass-through of high oil prices to the transport sector could also indirectly impact other commodity costs.
According to ICICI Direct:
Average palm oil prices rose 60% year-on-year and 6% sequentially.
Average crude prices rose 68% over the preceding year and 6% quarter-on-quarter.
Copra prices have remained largely unchanged over a year ago, but fell 22% from its peak in March.
Pricier Packs In Demand
A few months ago, consumer goods makers were launching cheaper stock-keeping units, or packs, to attract consumers as the economic slowdown hurt demand. That trend, according to Bizom, seems to have now reversed.
There has been an 8% increase in higher-priced SKUs especially for staples like cooking oil, spices and basmati rice, which now contribute to almost 45% of total sales. A sharp rise in input costs and the festive stocking have contributed to this transition. Beverages and homecare products have seen a moderate increase in share of high-priced products, the data showed.
And companies have been beefing up new launches as demand for premium and higher-priced products rise. “Packaged foods showed the highest traction in terms of number of new premium products launched (28% share of total) followed by personal care products (23% share of total),” Bizom said.
Analysts, however, disagree with Bizom’s FMCG sector sales projections of 30% in September, 44% in August and 60% in July—all year-on-year. “We expect to see relatively modest growth and estimate average volume growth at 8.5% YoY for Q2 FY22 (base 1.8%),” said Abneesh Roy, executive director at Edelweiss Financial Services. He said rural demand in the second quarter remained resilient while urban demand, including modern trade, has been recovering gradually.
Q2 Earnings Preview
Q2 FY22 performance is likely to be better with sales and profit before tax expected to increase 25% and 16.4% year-on-year, respectively. Ebitda margins to contract 115 basis points.
We expect volume growth across all companies due to improvement in consumer sentiment and opening up of the economy.
The current inflationary environment led by global supply chains is a joker in the pack and can result in margin and demand volatility in the near term.
There has been a decline in demand for many of the essentials than last year and Q1 levels as Covid-19 incidence is going down. We see pressure clearly visible on sanitisers, hand wash, immunity boosters and in-home consumption items.
Discretionary products have benefited from easing of lockdown norms. We see strong traction in skin care, beauty products, deodorants, extruded snacks and out-of-home consumption products.
Q2 FY22 is likely to report strong cumulative growth numbers—15% on the topline, 10% on Ebitda, and 10% on profit after tax. This is on a cumulative base of 5.4% and 7.3% in sales and Ebitda, respectively, in Q2 FY21.
A large portion of this growth is likely to come from pent-up demand for discretionary on the back of a) improved mobility, b) restrictions being progressively lifted, c) stores remaining open for a longer time, and d) modern trade reopening—all of which have been faster than last year.
Rural markets have remained resilient on the back of a strong kharif crop, good rabi sowing, and the monsoons ahead of their long-period averages.
Year-on-year gross margins are likely to remain under pressure on rising inflation.
Out-of-home categories to outperform this quarter.
Q2 FY22 has seen normalisation of consumption trends after a recovery from the pandemic’s second wave. 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.
Cigarette companies would see 5-7% volume growth in Q2.
Structural trends in the FMCG sector i.e. direct distribution expansion, e-commerce channel sales growth, consumption shift towards packaged foods and new launches would continue to drive growth in the medium term.
Commodity inflation to pressure margins in near term.
Essentials/staples companies are expected to hold their ground in Q2.
Recovery of discretionary consumption, which had paused on account of the second Covid-19 wave in Q1 FY22, resumed in Q2 FY22 at a sharper pace.
While FMCG companies had seen a normal operational environment in Q2 FY21, most discretionary companies continued to have an exceptionally low base, thereby making YoY growth numbers look optically strong.
Overall revenue to grow by 7% in Q2 FY22 over Q2 FY20, led by consumer staples. Ebitda margin may contract 140 basis points over preceding year since cost savings won’t be able to counter the dual impact of raw material inflation and high advertising spends. At the operating level, margins likely to be down by 90 bps year-on-year.
Rural markets continued to remain resilient on the back of a strong Rabi harvest, healthy realisations, good kharif sowing and a decent monsoon season, which resumed after a brief pause.