FMCG sector Q4FY23 review: Margin recovery begins

31 May 2023 , 10:43 AM

Aggregate gross margin showed expansion of 72 basis points over the year-ago quarter after declining for 13 straight quarters. This came on the back of moderation in input costs. Food companies — Varun Beverages (VBL), Mrs Bectors (MBFSL), Nestle and Bikaji — reported a stellar top-line performance; while most of the HPC companies witnessed a subdued growth. Analysts at IIFL Capital Services prefer HUL, Dabur, Britannia and Jyothy labs in this space.

10% sales growth

Aggregate revenues grew at 10.5% in Q4FY23. Growth was due to a balance of pricing actions and volumes. Companies had taken calibrated price increases to counter inflation in previous quarters. YoY volume growth for the universe improved sequentially with gradual revival in the consumption environment. Almost all companies in the universe reported positive volume growth during the quarter. Food companies such as VBL, MBFSL, Nestle and Bikaji reported robust top-line growths in Q4; HPC companies continued to witness subdued growth.

Gross margin pressure easing gradually

Aggregate gross margin (ex-ITC) witnessed YoY expansion of 72 basis points during the quarter after declining for thirteen consecutive quarters, led by easing of key raw material prices. Three companies witnessed over 500 basis points gross margin expansion – Britannia (strong pricing actions), ITC (higher sales of cigarettes, better FMCG margins and product mix in Agri-business) and Bikaji (softening of raw material prices). Prices of certain commodities have come off from highs, resulting in aggregate gross margin expansion of 99 basis points sequentially. It is further expected to improve gradually from these levels.

Sector EBITDA performance

Companies continue to be prudent in terms of advertising spends. Aggregate ad-spends recorded a growth of 9% YoY, but remained flat as a percentage of sales. Aggregate EBITDA grew 16.4% (versus 12.5% in the previous quarter) and the companies with the highest gross profit growth (VBL, MBFSL, Bikaji, Britannia and Jyothy labs) in the quarter have gone on to witness high-double-digit EBITDA growth as well. UNSP (higher ad-spends) and Dabur (decline in consumer care margins) recorded double-digit decline in EBITDA.

Road ahead

Certain input commodities such as veg oils, packaging materials, copra, among others have corrected from the peak; price hikes taken in past quarters have led to YoY as well as sequential margin improvement in Q4. Analysts at IIFL Capital Services expect improvement in margin trajectory to continue; however, price anniversaries in coming quarters will drag revenue growth in near term. The companies are also in process of taking price cuts to pass on some benefits of easing input costs and revive volumes, but the volume growth is expected to be gradual. Analysts at IIFL Capital Services prefer HUL, Dabur, Britannia and Jyothy labs in this space.