Uneven monsoon weighs on demand for FMCG firms

Fast moving consumer goods (FMCG) companies are expected to see muted topline growth, with uneven spread of the monsoon impacting demand.

Rural demand recovery, too, remains elusive in the July-September quarter.

Brokerages expect volumes to remain steady in the quarter on a sequential basis.

“On rural demand, we believe that the overall recovery, although not sharp, is witnessing some signs of slow revival,” brokerage house Nirmal Bang said in its preview report on the sector.

In its pre-quarter commentary, Marico said demand trends in the September quarter were largely similar to those in the preceding quarter.

Rising food prices and below-normal rainfall distribution in some regions seems to have delayed the expectation of rural demand recovery.

Godrej Consumer Products also said in its quarterly update that it witnessed weak macros and adverse weather conditions during the quarter.

Another reason for weak demand witnessed in the quarter was the festival season extending to the third quarter this year, Elara Capital said in its report.

The brokerage also added: “Although the southwest monsoon in rural India was for the most time normal, its uneven distribution over time and regions may impact agricultural income and consumption.

“Differences in monsoon patterns could impact an already weak recovery in rural demand.”

Margins, however, are expected to improve on a year-on-year basis.

“Q2FY24 will witness significant Y-o-Y gross margin expansion for several companies but rising ad spends (off a low base), significantly lower realisation growth versus preceding quarters, and persistently tepid volume growth mean that Y-o-Y growth at Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin level will not be material for most players,” Nirmal Bang said in its report.

The brokerage also expects FMCG companies it tracks to clock revenue growth of 5.2 per cent compared to last year, which it says is muted.

IIFL Securities also noted in its preview, “Aggregate Ebitda growth is expected at 11.2 per cent Y-o-Y, while aggregate Ebitda margin (ex-ITC) would expand 118 bps (basis points) Y-o-Y, largely due to gross margin expansion.”

It said prices of commodities such as crude oil, edible oils and packaging materials have fallen Y-o-Y, and added that commodities like wheat and sugar have been witnessing inflation Q-o-Q.

The brokerage also expects aggregate ad spends as a percentage of sales would go up by 180 basis point Y-o-Y and by 10 bps sequentially.

Brokerages said that the key monitors for this quarter are effects of late monsoon recovery on rural income and its impact on rural demand with expectations of festive season demand.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Source: Read Full Article