FMCG: Poor rural demand hamper HPC growth

15 Nov 2023 , 10:25 AM

Aggregate revenue /Ebitda/ PAT increased by 5.9%/11.5%/9.6% YoY, driven by a mix of volume and pricing growth. However, excluding ITC, the aggregate revenue grew by 6.5%. The aggregate gross margins expanded by 372bps on account of softening of commodity prices. Food companies Varun Beverages (VBL), Mrs. Bectors (MBFSL), Nestle and Sula reported a stellar top-line performance; while most of the HPC companies reported a subdued growth. Analysts of IIFL Capital Services prefer Godrej Consumer, Varun Beverages, HUL and Dabur. 

6% sales growth: 

Aggregate revenues grew by ~6% in Q2FY24 and the growth was driven due to a mix of pricing actions and volume led growth. Ex-ITC, the sale growth was ~6.5%. This quarter, the rural demand remain subdued due to uneven distribution of rainfall and rising inflation. Food companies- Varun Beverages (VBL), Mrs. Bectors (MBFSL), Nestle and Sula reported a stellar top-line performance; while most of the HPC companies reported a subdued growth largely impacted by slowdown in rural demand. 

Gross margins expand:

The gross margins (ex-ITC) witnessed a sharp YoY expansion by 581bps (+298bps in 1QFY24, +72bps in Q4FY24) on account of softening of key raw material prices. Three companies witnessed more than 700bps gross margin expansion during the quarter- Jyothy Labs, HUL and Godrej Consumer. The gross margins (ex-ITC) expanded by ~73bps sequentially. 

Sector Ebitda performance: 

Aggregate Ebitda grew by 11.5% (vs 16% in 1QFY24, 16.4% in Q4FY23) largely led by gross margin expansion. This quarter witnessed a whopping 44% YoY rise in adspent and the advertisement expenditure as a % of sale were ~10%. The Ebitda margin expanded by 129bps YoY vs 245bps in 1QFY24. Jyothy Labs, Mrs. Bectors and Bikaji Foods reported a strong Ebitda growth of 68.3%/45.5%/36.6% whereas the Ebitda margin for these companies witnessed a YoY expansion of 628bps/280bps/328bps.

Road ahead: 

Certain input commodities such as packaging materials, Copra, veg oils, among others have corrected from the peak; price hikes taken in the past quarters have led to YoY as well as sequential margin improvement in Q2FY24. From here-on, the margin expansion will be at a slower pace and will be driven by mix improvement and cost savings. With the onset of upcoming long festive season, moderating inflation, increased government spending on infrastructure (especially in rural areas) and fears of a weak monsoon abating with a strong pick-up in September, analysts of IIFL Capital Services expect gradual recovery in the demand environment. However, price anniversaries are expected to drag revenue growth in near term. Analysts of IIFL Capital Services prefer Godrej Consumer, Varun Beverages, HUL and Dabur.