Subdued results from most consumer product companies for the September quarter suggest that the economic recovery is still fragile. The companies have been unable to garner volumes at a price that covers rising input costs. A study by Kotak Institutional Equities (KIE) reveals the three-year compounded annual growth rate (CAGR) in volumes of consumer staples and revenues of consumer durables indicate demand hasn’t fully recovered from the hit to household incomes.
Sanjiv Mehta, MD&CEO, Hindustan Unilever (HUL), had said after the Q2 results that in the September quarter, the market for the categories that the company operates in, grew in mid-single digits. “Volume continues to decline in both urban and rural markets with a more pronounced drop in rural,” Mehta said.
At HUL, the underlying volume growth in Q2FY23 was 4%, similar to that in Q2FY22.
At Tata Consumer, the standalone volumes for the September quarter were virtually flat. Volumes of local tea have grown at a three-year CAGR of 4.1%, possibly hit by the poor demand in rural markets. Dabur reported a volume increase of 1% y-o-y for the September quarter, while Colgate saw volumes fall 2% y-o-y taking the three-year CAGR to 1.8%.
Mohit Malhotra, CEO, Dabur, said data shows the demand environment is pretty lukewarm. “Volumes are going down, the growth that you are seeing in the syndicated data is all coming on back of the price increases,” Malhotra said.
The three-year CAGR for domestic volumes at Marico is 7%, with the underlying volume growth in Q2FY23 coming in at 3%. MD&CEO Saugata Gupta said rural markets would be closely watched and the company was hopeful of a recovery. “We expect to deliver mid-single digit volume growth in H2,” Gupta said.
While the three–year CAGR of volumes at Asian Paints is in high double-digits of about 18%, analysts believe they have lost some momentum; the management indicated the extended monsoon hurt sales though there has been some down-trading by customers.
“The growth appears more disappointing as the Indian economy was already witnessing a broad slowdown in the base period. It is interesting to see the weak growth of staples, which would suggest a disproportionate impact of Covid-19 pandemic on low-income households. They appear to have reduced usage, down-traded to cheaper products and migrated to unbranded projects from the unorganised sector,” analysts at KIE wrote.
Also read: Award of PPP grain silos gathers pace
While GST collections for the seven months to October have gone up by 14.1% on a three-year CAGR basis, the average wholesale price index has risen at a three-year CAGR of 8.2% in the first six months of FY23. While the formalisation of the economy has no doubt boosted GST collections, analysts point out they have also been supported by high inflation. As such, the numbers could be masking weak volume growth.
Several firms have trimmed expenses on advertising and promotions (A&P) to arrest the fall in operating margins. Although gross margins at HUL contracted nearly 600 basis points y-o-y, the lower A&P spends which were down 250 bps y-o-y, helped the company defend the operating profit margins at 22.9%.
Dabur’s Malhotra observed that on account of continued unprecedented material inflation, the gross margins contracted by 300 bps plus. “This was partially offset by price increases and saving initiatives and led to operating margins declining by around 190 bps to touch 20.1%,” Malhotra said.
Gross margins at Colgate fell 310 bps y-o-y, the cut in ad spends by nearly 15% y-o-y helped the company report an Ebitda margin of 29.4%.