While demand in the fast moving consumer goods (FMCG) sector is unlikely to have improved significantly in the October-December quarter as compared to the previous one, margins are still expected to do better sequentially due to easing in raw material prices, analysts said.
“Overall FMCG demand is unlikely to improve materially in Q3FY23 (over Q2), with demand slowing down post the festive season,” Nomura said. However, the latter part of the quarter has witnessed some early signs of recovery in demand on moderation in inflation, it added. However, with commodity prices for most raw materials having moderated quarter-on-quarter in Q3, FMCG companies are expected to post modest margin improvement.
According to Nomura, operating profit margin could see “moderate sequential” improvement in Q3 as benefits from gross profit margin improvement will likely be reinvested in market development activities.
The brokerage expects advertisement spends in Q3 to continue at Q2 levels to support sales and new launches. Volume growth in FMCG sector in December quarter is expected to be in low-to-mid single digits year-on-year (and only marginal improvement quarter-on-quarter) on the back of inflationary pressures weighing down on consumer wallets, downsizing from larger pack sizes to smaller packs, optically impacting volumes, and calibrated consumption in some non-essential categories.
According to Kotak Institutional Equities, FMCG major Hindustan Unilever is expected to report 4% y-o-y volume growth, Britannia
Price-led growth will likely continue across most categories, however, the quantum of price increases could moderate.
On the demand front, no incremental improvement or deterioration in underlying demand trends across urban or rural markets is expected. Rural demand is likely to remain tepid in Q3 due to continued inflationary pressures on rural consumers’ wallets, which would result in down trading to smaller packs and brands.
However, some improvement in rural markets is expected from Q4 on the back of upcoming harvest season and better minimum support prices, most analysts said. However, Motilal Oswal is of the view that weak rural sales growth from Q4FY22 may result in optically better growth from Q4FY23 onward, but on-the-ground rural demand is still adversely affected by inflationary pressures.
Urban demand, on the other hand, would continue to fare better in 3Q23, driven by likely continued momentum across modern trade and e-commerce platforms. Demand in premium discretionary categories may remain intact, and see a lower impact in demand for upper-income consumer segments which should aid in maintaining the overall urban demand momentum, analysts said.