Hindustan Unilever, Marico, Godrej Consumer Products, Britannia and Nestle are near their 52-week highs. Nifty FMCG is up 35% YoY. The fast moving consumer goods (FMCG) sector is on a roll after strong and stable March Quarter 2023 results. Declining retail inflation in April 2023 improved sentiment among investors.
With stable commodity prices, cooling inflation and rural stress expected to come down in the near future, the FMCG sector is on the upswing. All major FMCG players reported double-digit revenue growth in Q4FY23, barring Marico and Dabur.
While ayurvedic major, Dabur was impacted by lower growth in healthcare vertical, Marico passed on lower commodity price benefit to consumers through price cuts leading to lower revenue growth in March Quarter 2023.
As operating margins improve, A&P spends back on track
FY23 started with the Ukraine war and geopolitical tensions which led to steep inflation and high interest rate hikes across the global economy. In India too, consumer sentiment was impacted due to high retail and food inflation. But with the moderation in retail inflation levels, there has been gradual recovery in FMCG consumption levels in the past six months. All major FMCG players reported strong top-line growth and healthy operating margins. Compared to last fiscal, FY24 is going to be better for the FMCG pack with the moderation in raw material prices. Supported by volume growth and rejuvenated A&P strategy, FMCG sector is expected to log in strong margin expansion in FY24.
Marico, Britannia, Tata Consumer Products and Godrej Consumer Products reported strong operating margin expansion in Q4FY23. While Hindustan Unilever (HUL) and Nestle reported moderate operating margin contraction, Dabur’s operating margin fell more than two percentage points in Q4FY23. According to Dabur management, operating margin contraction was mainly due to change in product mix and higher media investments (up 16% YoY) in Q4FY23.
To control costs, FMCG players cut down media investments or advertising & promotion (A&P) expenses in FY23 and maintained operating margins. Ankush Jain, Chief Financial Officer, Dabur said that media investments contracted 18-20% in the first nine months of FY23. Though cost reduction measures support stable margins during tough times like Covid-19 pandemic, with cooling raw material prices and low inflation levels, FMCG players have reversed their A&P strategy. All FMCG companies are increasing their media investments to increase customer franchise and enhance volume growth. Mohit Malhotra, Managing Director, Dabur said, “Our total media today is around 5-5.5%. We want to take it up to roughly around 7-8%. and start re-investing in our brands.” Speaking on A&P spends, Sanjiv Mehta, outgoing CEO and Managing Director, HUL said, “Our A&P during this year was the lowest in several years at about 8.4%. And when you compare with the pre-COVID level, it was at 12.2%.” The market leader aims to increase A&P investments to launch new brands and increase competitive spend which will ultimately lead to higher revenue and volume growth. Tata Consumer Products, Godrej Consumer Products and Marico are also moving on the same path to increase their media spends which will help in improving their market share and augment volumes.
Rural India to spur volume growth
Britannia reported highest operating margin expansion of 475 basis points (bps) supported by lower raw material prices of palm oil, laminates and corrugated boxes. Varun Berry, Vice Chairman and Managing Director, Britannia said that the company will face lower inflation of about 3% in FY24 aided by strategic procurement of key raw materials in 2023. While Britannia’s operating margins expanded handsomely in Q4FY23, volumes were just 1%. Apart from Dabur and Britannia, all major FMCG reported stable mid-single digit volume growth. For a consistent margin expansion and revenue growth, healthy volumes are essential. Biscuit major, Britannia has guided volume recovery on the back of price cuts, grammage increase and improving rural reach in FY24. As input costs reduce, FMCG players are expected to increase grammage in price point packs leading to higher volume growth. But that alone will not help. For volume growth to be on a stable trajectory, rural India needs to fire all cylinders.
FMCG volumes reverted to positive territory after five quarters, up 0.3% YoY in March Quarter 2023. While urban consumption is steady, rural India stress seems to have bottomed out. According to Mehta, though rural volume growth is improving, it is still muted at minus 3% in Q4FY23. He further added that in FY23, urban India value growth was 11% YoY but just 4% YoY for rural India. Rural India accounts for about 30-40% of FMCG volumes. This is one of the main reasons that FMCG players are increasing their A&P spend to increase their customer franchise in rural India and improve volume growth. The recent 11% MSP hike for kharif crops is expected to aid rural demand recovery. Hopefully the rain gods should not play spoilsport.
