The fiscal third quarter was yet another subdued one for the consumer staples segment with indication of it already there from post Q2 commentaries highlighting urban slowdown/weak festive demand/delayed winter. According to JM Financial, volume trajectory is expected to remain subdued in the fourth quarter as well. “Our analysis suggests that Q4FY25 consensus expectations for staples have been toned down, especially on the EBITDA front – 5 per cent cut vs estimates prior to Q3 results, resulting in low-single-digit EBITDA growth. From a medium-term perspective, we have seen a consensus earnings cut of 4 per cent for FY26/27E for our staples coverage (ex-ITC) companies,” the brokerage firm said.
During the third quarter, revenue growth was largely in line, however, negative surprise was gross margin delivery, which missed the estimates. Key highlights, per JM Financial, were: a) Volume growth moderated a tad vs Q2, pricing growth turned positive, b) consumer downtrading/high promotional intensity led to adverse price/mix in certain categories (oral care, HI, paints, biscuits) and c) A&P spends (% to sales) continued to see rationalisation YoY.
Consumer staples companies have, for long, been struggling to maintain volume growth momentum during the last two years, largely due to external challenges such as erratic monsoons and high inflation, which severely dampened consumption in the mass segment.
Outlook for Q4FY25
While volume trajectory is expected to remain subdued in Q4, JM Financial said, pricing growth is likely to be higher vs trends seen in 9MFY25 as Foods & HPC (Soaps, Hair Oil) players implement price hikes – indicative from commentaries of Britannia, HUL, GCPL, Marico, Bikaji & Gopal Snacks. “Within our staples coverage, we expect Marico, TCPL, and Bikaji to outperform with mid-teen sales growth followed by high-single-digit sales growth for Britannia in Q4,” the brokerage firm stated. On sequential basis, it added, GMs are unlikely to deteriorate further, however YoY compression will continue (atleast for Q4FY25/Q1FY26, post which high RM will start coming into base). Hence, EBITDA performance is likely to lag sales growth for most of the staples players. “While further GM compression (from Q3 levels) is unlikely, the pace of recovery in urban/sales growth will be key for rerating. We stay selective – we prefer VBL, GCPL, Marico, Britannia and Bikaji within our coverage universe,” it said.
Amidst a challenging operating environment, management commentary remained cautious from the near-term perspective. The analysis report by JM Financial suggested that consensus estimates for Q4 have been toned down – from 10 per cent sales growth (prior to Q3FY25) to now 8 per cent growth in Q4FY25E. EBITDA growth moderation has been much higher, from 6 per cent EBITDA growth earlier to now 1 per cent, primarily on account of higher-than-anticipated RM inflation impact.
A look at Q3 performance
JM Financial said that the volume recovery remained elusive amidst continued moderation in urban growth and grammage cuts while rural sustained gradual recovery. What supported sales growth was the pricing lever coming into action this time around. With calibrated price hikes, price/mix growth turned positive after 4 quarters, stated the report. Despite well-controlled A&P spends, EBITDA declined and margins were lower due to steep input costs inflation and scale deleverage. “Within our coverage universe, there were no major positive surprises, barring ITC – cigarette volume growth, and Britannia/Honasa where operating performance was ahead of estimates. On the other hand, Asian Paints disappointed in terms of revenue performance, while on the operating front, Bikaji, ITC, TCPL, Colgate saw weaker-than-envisaged margin delivery,” JM Financial maintained.
In recent quarters, consumer downgrading has become a notable trend (smaller packs seeing faster growth) driven by increased price sensitivity amidst high inflation, credit tightening and urban slowdown. Within staples, this was alluded to by HUL (UVG impacted by negative mix), and GCPL (in Household Insecticide). On the discretionary front, the trend was mixed – paint players (Asian Paints, Berger Paints) saw downtrading/slower growth in premium segments due to urban slowdown while alcoholic beverages saw strong outperformance in the premium segment. This apart, competitive activity remained intense in certain segments – as is evident from increased promotional intensity seen in Colgate/Dabur/Britannia/ITC-FMCG (Biscuits/Noodles).
Now with RM prices remaining elevated, the sector has witnessed gross margin pressures in recent quarters. “Sharp inflation weighed on volumes and impacted margins for food players (gross margins for Gopal Snacks, Bikaji, and Britannia down 400- 600bps YoY in Q3) as well as HPC players (Hair Oil and Soaps). Our staples coverage universe’s gross margin of 49 per cebr was the lowest seen in the last 7 quarters. Calibrated price hikes are getting implemented to cushion some of the impact – Britannia hiked prices by 2 per cent in Q3 and plans another 4.5 per cent hike by Q1FY26, Bikaji hiked prices by 2- 2.5 per cent in Oct and plans an additional 1-1.5 per cent hike in Feb-Mar’25, Marico undertook 5 per cent price hike in Parachute Rigids at the end of Q3, TCPL carried out calibrated price hikes, and GCPL has also initiated further price hikes in soaps,” the JM Financial analysis report stated.