Earlier in the year there were expectations that FMCG prices might moderate going forward, especially with raw material prices softening further. However, the pricing scenario across the host of FMCG products have remained stable and the concern now is if this would result in added competion from the unorganised segment. BNP Paribas, in its report, highlights that revenue-growth challenges might reemerge if price cuts are not implemented to drive volumes.
According to Kunal Vora, Head – India Equity Research of BNP Paribas, “We see risk to the street’s revenue and earnings estimates even as margin comfort is improving We think the FMCG sector seems well poised in H1FY24 with raw material cost tailwind. However, in H2FY24 we expect revenue growth to moderate as pricing benefits should fade and growth would have to be volume-led.”
The key trends that BNP Paribas observed include the price action in the FMCG space. Prices have increased sharply over the last two years. Soap and detergent prices have risen 40-50% over that period. “We believe price cuts might be needed to drive volumes. We also see a risk of increase in unorganised competition if prices are not lowered,” Vora added.
Price hikes have been a key driver of sales growth in several categories. As pricing continues to “anniversarise” (part of the base), Vora pointed out that they, “expect revenue growth challenges to re-emerge, especially in H2FY24.” As raw material cost has risen recently for particular categories such as value-added hair oil (VAHO) and beverage, companies have raised their prices and “we think the benefit of price hike in these categories should continue in the quarters ahead.” he explained.
One of the key concerns at this juncture is that large cumulative price hike over the last two years could keep volume growth in check. In the soap category, the BNP Paribas tracker indicates that the contribution of price hikes is coming off sharply. Within the category, the value segment, which drives the bulk of volumes, has seen price cuts, while premium soaps’ prices are still up on a year-onyear basis. Prices of most soaps have risen 50% from those in Q1FY22 and “we believe more price cuts might be needed to drive volumes. In hair oil, companies largely abstained from taking price hikes in the VAHO category in FY22 and FY23, but have taken small price hikes recently amid an increase in light liquid paraffin (LLP) price,” he outlined.
That said he also gave a segment wise analysis highlighting that over the last two years, oral care has seen sharp price hikes and “we see revenue growth challenge continuing in the category.” In detergents there has been a 40% price hike over the last two years. LAB price has come off in the last one year and detergent prices have been stable for the last six months. Here too Vora expects, “potential increase in competitive intensity if prices are not lowered.”
The other area where prices have been rising are tea and coffee. In this space prices have moved up in the last one year. Both categories have seen price hikes in the last two months as well. Edible oil is the only category showing price deflation year-on-year as well as on a two-year CAGR basis.
According to the BNP Paribas price tracker, “anniversarisation and stabilisation of price hikes in key categories.” Vora sees the El Nino as the other potential risk factor that could play a part in derailing the rural recovery. As a result, Vora sees scope for correction in select segments across FMCG.