FMCG firms may see margins improve in coming quarters | The Financial Express

FMCG firms may see margins improve in coming quarters

Hindustan Unilever (HUL), the country’s largest FMCG company, has guided that the net material inflation (NMI) will be sightly lower in the quarter ended December 31 on a sequential basis,

FMCG firms may see margins improve in coming quarters
The company’s gross margins fell 150 basis points sequentially to about 45%, which was sharply below estimates and at a multi-year low, according to analysts at Jefferies. (IE)

With a significant reduction in the prices of palm oil and some other commodities, Indian FMCG majors are expected to report better gross margins in the second half of the current financial year. However, the market continues to remain challenging amid volatility in certain other commodities and volumes under pressure.

Hindustan Unilever (HUL), the country’s largest FMCG company, has guided that the net material inflation (NMI) will be sightly lower in the quarter ended December 31 on a sequential basis, which will improve the gross margins. However, the NMI will remain high year-on-year. The company’s NMI further accelerated to 22% in the July-September quarter versus 20% in the quarter ended June.

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“Few commodities, largely palm oil, have corrected from their highs. With this softening and other commodities remain at the current elevated levels, we expect our December quarter NMIs to be slightly lower than our September quarter numbers, albeit remaining significantly high on a year-on-year basis. This will help us to marginally reduce the price vs cost gap and aid in sequential gross margin improvement,” Sanjiv Mehta, CEO and managing director, HUL, told analysts recently.

The company’s gross margins fell 150 basis points sequentially to about 45%, which was sharply below estimates and at a multi-year low, according to analysts at Jefferies.

Mehta said with the meaningful correction in palm oil prices, the company is taking “price cuts in big chunks” in its skin cleansing portfolio. However, in the home care segment it has taken further price increase in September with more inflation in key input materials.

According to Mehta, except palm oil, which has seen a meaningful correction from its peak, most commodities remain volatile and elevated, which is why the y-o-y improvement still remains sometime away. Some commodities like soda ash, milk powder, barley and cereals have further inflated during the third quarter, while strengthening of the US dollar is also adding to the inflation. “The FMCG market context has not changed significantly this quarter and continues to remain challenging…volume continues to decline in both rural and urban, with more pronounced drop in rural,” he said.

“While prices for most inputs remained firm, palm oil has corrected sharply with a 40% y-o-y decline and 10% quarter-on-quarter. We expect this to improve Q3FY23 GPM q-o-q despite price cuts in soaps,” analysts at Nomura said for HUL.

At Nestle India, the gross margin was down 292 bps on a y-o-y basis in the quarter ended September due to high input costs, especially in edible oil, milk, and packing materials, which was partly offset by better realisations.

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The Ebitda (earnings before interest, tax, depreciation and amortisation) margin declined by 240 bps y-o-y to 22% on the back of higher operating expenditure mainly due to fuel price increases. However, the prices of some commodities — edible oils and packing materials – are stabilising, while the prices of milk, fuels, grains and green coffee are expected to remain firm going forward, Suresh Narayanan, chairman and MD, Nestle India, said in a statement.

According to analysts, the sharp correction in edible oils and crude-related packaging costs would be reflected December quarter onwards for Nestle India. “A reversal in commodity inflation could fuel medium-term earnings growth,” analysts at HSBC said.

Mohit Malhotra, CEO, Dabur India, also hinted towards a sequential margin improvement in the next two quarters, though it sees a meaningful improvement only the next financial year onwards. “Inflation in the current quarter has been around 10%, but we expect inflation to abate a little to 6% levels, and price increase benefits of 6% kicks in now, so we expect inflation to moderate in the coming quarters. With that, sequentially our margins should be better as we go into the third and fourth quarter, but there will be some amount of margin erosion which can’t be ruled out in this quarter as well as the next.”

However, Tata Consumer Products (TCPL) continued to be sceptical on improvement in margins. “We are not yet out of the woods. This quarter is still a choppy quarter and in India we do need to see if demand is coming back consistently before we declare anything (on tea, tea volumes were lower). I would at least give it a quarter before making a call,” Sunil D’Souza, CEO and managing director, TCPL, told analysts.

The gross margins for the food and beverage company of the Tata group was at 41.7%, a decline of 101 bps y-o-y and 87 bps q-o-q owing to high raw material inflation and cuts in tea prices during the quarter.

With inputs from Kritika Arora in Mumbai

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First published on: 28-10-2022 at 01:45 IST