Q3FY23 FMCG: Margin pressure starts easing

17 Feb 2023 , 11:33 AM

Aggregate revenue/Ebitda/PAT for Q3FY23 increased by 8.9%/12.6%/15.5% YoY, and 10.5%/9.7%/8.6%, on a 3yr Cagr basis. Most of the companies reported either a decline, or low single-digit volume growth during the quarter, while aggregate gross margin YoY contracted for a thirteenth straight quarter led by higher raw material inflation. Food companies such as VBL, Nestle, Britannia and Mrs Bectors (MBFSL) reported a stellar top-line performance, while most of HPC companies witnessed a subdued growth.

9% Sales growth:

Aggregate revenues grew at 9% in Q3FY23. Excluding VBL and ITC, the aggregate revenues grew at 10.2% in Q3 (vs 13.3% in 2Q), 300bps decline sequentially is primarily due to early festive season and delayed winter. Companies had taken calibrated price increases to counter inflation in previous quarters. Most of the companies reported either volume decline or a lower single-digit volume growth in Q3FY23 driven by slowdown in rural consumption.

Margin pressure easing off gradually:

Aggregate gross margin (ex ITC) witnessed YoY contraction for the thirteenth consecutive quarter contracting 159bpsYoY with persistent inflationary pressures. Three companies witnessed more than 400bps gross margin expansion during the quarter – Agro Tech (franchising Crystal operations), Britannia (price hikes) and ITC (Higher sales of Cigarettes). Prices of certain commodities have started cooling down from their highs, resulting in aggregate gross margin expansion of 183 bps sequentially. Gross margins are further expected to improve gradually from these levels.

Wide variation in Ebitda growth YoY:

Aggregate Ebitda grew 12.6% (vs. 12.8% in the previous quarter). There was wide variation in Ebitda growth YoY across companies, with the likes of Mrs Bectors, Britannia, VBL and Jyothy labs delivering considerably high double-digit growth, while UNSP, Bajaj Consumer and Emami witnessing sharp declines. On a 3yr Cagr basis, VBL, MBFSL, Britannia, Nestle and ITC have delivered double-digit Ebitda growth.

The road ahead:

Certain input commodities such as veg oils, packaging materials, among others have corrected from the peak and price hikes taken in the past quarters have led to gradual sequential margin improvement in Q3. Analysts at IIFL Capital Services expect improvement in margin trajectory to continue; and volume growth to revive with the recovery in demand as inflation moderates further. The companies are also expected to pass on the benefits of moderation in input costs to the end consumer to revive volume growth in coming quarters.

Analysts at IIFL Capital Services prefer HUL, VBL, Dabur, and Britannia in FMCG space.