Q1FY24 Review: India FMCG: Sharp margin expansion seen in Q1

21 Aug 2023 , 09:47 AM

Aggregate Revenue/ EBITDA/ PAT increased by 3.9%/ 14.4%/17.1% YoY, driven by a balance of pricing and volumes. However, excluding ITC, the aggregate revenue grew by 8.5%. Aggregate gross margin showed significant expansion of 298 basis points YoY with a moderation in input costs. Food companies such as Mrs. Bectors (MBFSL), Sula, Nestle and Bikaji continued to report a stellar top-line performance. 

Sales growth moderates

Aggregate revenues grew at 3.9% in Q1FY24. However, excluding ITC, the aggregate revenues grew at 8.5% in the quarter. The growth in the quarter was due to a balance of pricing actions and volumes. Companies had taken calibrated price increases to counter inflation in previous quarters. Almost all companies in the universe reported positive volume growth during the quarter. YoY volume growth for the summer-centric portfolio companies such as VBL, Emami and Dabur were impacted by unseasonal rains. Food companies such as MBFSL, Sula, Nestle and Bikaji reported robust top-line growth in Q1; Most of the HPC companies remain subdued.

Gross margins expand

Aggregate gross margin (ex-ITC) witnessed a sharp YoY expansion of 298 basis points during the quarter (+72 basis points in Q4), led by easing of key raw material prices. Three companies witnessed over 800 basis points gross-margin expansion– Bikaji and Jyothy labs, driven by softening of raw material prices, and ITC driven by better FMCG, Hotels and Agri business margins. Prices of certain commodities have come off from highs, resulting in aggregate gross margin expansion of 81 basis points sequentially. It is further expected to improve gradually from these levels.

Sector EBITDA performance

Aggregate ad-spends recorded a growth of 16% YoY, expanding 72 basis points as a percentage of sales. The highest increase was seen in GCPL and Dabur. Aggregate EBITDA grew 14.4% (versus 16.4% in the previous quarter); the companies with the highest gross profit growth (Bikaji, Jyothy Labs and MBFSL) in the quarter have gone on to witness high-double-digit EBITDA growth as well.

Road ahead

Certain input commodities such as vegetable oils, packaging materials, copra, among others, have corrected from the peak. Price hikes taken in the past quarters have led to margin improvement in Q1, both YoY and sequentially. Analysts at IIFL Capital Services expect improvement in margin trajectory to continue; however, price anniversaries will continue to drag revenue growth in near term. The companies have started taking price cuts to pass on some benefits of easing input costs and revive volumes; but the volume growth is expected to be gradual.