Sales at India’s consumer staples companies are likely to grow 13.8% year-on-year in the July-September quarter, higher than their eight-quarter average of about 9%, according to a Nomura report. Operating profit growth is also pegged at 13.8%. Margins, however, are expected to face pressure as companies use up costlier inventory.
According to the report, demand is largely stable even after the full effect of price hikes taken by companies following the West Asia war.
FMCG sales growth and volume outlook
According to Nomura, volume growth will remain stable from the previous quarter. Pricing growth, however, will be higher because the second quarter carries the full impact of the price hikes.
Most companies have raised prices, but the increases remain materially below the current input cost inflation. Packaging materials have seen the sharpest rise.
Among staples, Nestle India is expected to post the strongest revenue growth at over 20%, on high-teens volume growth. Hindustan Unilever and Dabur are likely to record the lowest growth, at 11% to 12%. In discretionary, Lenskart is expected to lead with revenue growth of 28.5%, and Titan’s jewellery sales are pegged at 25%. United Spirits is seen at about 6%.
Rising input costs threaten FMCG margins
The report noted that gross margins are likely to contract from a year earlier for most staples companies, though they should largely hold on a sequential basis. Operating leverage is expected to keep EBITDA margins steady from the previous quarter.
Paints companies face a tougher quarter. As per Nomura, volume growth of 6% to 7% and revenue growth of 13% to 14% is expected. Gross margins are likely to shrink both year-on-year and sequentially as firms consume high-cost inventory.
On EBITDA, the report estimates growth of about 35% for Nestle India and over 25% for Marico. Marico is expected to benefit from copra prices that are down 32% from a year earlier. At the lower end, Hindustan Unilever, Asian Paints and Britannia are seen at about 8%. United Spirits is the only name in the group of stocks the report calls out for a decline in EBITDA among discretionary picks, at 6.3%.
Rural demand faces monsoon and El Niño risks
The report said it will keep watching rural demand, which it expects to face several headwinds. Southwest monsoon rainfall is 12% below the long-period average so far. About 75% of Maharashtra and Karnataka are under drought conditions.
The report also flagged the risk of El Niño strengthening and continuing until February 2027, which could hurt the high-margin winter portfolio. Continued geopolitical uncertainty could add to pressure on crude and raw material prices, it said.
Nestle, Marico and Tata Consumer lead growth expectations
As per Nomura, positive surprises from Tata Consumer Products, Marico, Colgate, Allied Blenders and Distillers, Lenskart and Nestle India are expected.
For Tata Consumer, the report expects revenue growth of 12.5% and EBITDA margin improving to 14% from 13.5% in the first quarter. Marico’s volume growth is pegged at 8.5%, though revision of earlier price moves will bring its sales growth down to 13% from the 20%-plus range of recent quarters.
Colgate’s volume growth is expected to improve to 9%, aided by a low base. Allied Blenders is seen posting premium volume growth of 13.5%, led by Karnataka.
Negative surprises are likely at United Spirits, Godrej Consumer and Britannia. United Spirits volumes are expected to fall 4%, with continued pressure from Maharashtra Made Liquor. Godrej Consumer is seen facing the highest margin pressure among staples because of its exposure to palm oil and crude derivatives, with consolidated margins at 18.8%.
For Britannia, the report expects volume growth of 13.5%, but higher ad spends and a high margin base could hold EBITDA growth at 8.3%, below revenue growth of 14.6%.
ITC cigarette sales face impact of price hikes
ITC’s numbers reflect the impact of price hikes. Cigarette volumes are expected to fall 7.5%, according to the report. Cigarette EBIT is seen declining 27%, narrower than the 35% fall in the first quarter. Cigarette EBIT margin is likely to rise to 64.5% from 61.8%.
The report noted that ITC has taken another round of price hikes in late September. The company aims to bring EBIT per stick back to pre-hike levels by the end of the fourth quarter.
Nomura’s top FMCG picks and valuations
Nomura said it expects a volatile demand and margin environment and prefers companies with strong brands, pricing power and resilient portfolios. Its top picks in staples are Marico, Tata Consumer Products and ITC. In discretionary, they are Lenskart, Titan and Allied Blenders.
On valuations, the report showed the staples group excluding ITC trading at 47 times one-year forward earnings. That is a 10% discount to its one-year average and 12% below its 10-year average. ITC trades at 27 times, a premium of 20% to its one-year average.
Nomura has a Buy rating on every company it covers in the sector. According to the report, its target prices imply the most upside for Kansai Nerolac at 65% and Dabur at 64%. The lowest is Titan at 16%.
The results season will show whether price hikes can keep pace with rising costs. Rural demand is still an unknown factor. Monsoon rainfall is 12% below normal, and kharif sowing is down 1.4% from last year, the report noted.