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FMCG Q4FY22 Preview: Volumes to de-grow with steep price hike

ICICI Securities 11 Apr 2022

What's Buzzing:

FMCG companies are expected to witness dismal volumes in Q4FY22 given steep price hikes leading to down trading to economy brands or smaller SKUs. Further rural regions have been witnessing a dismal demand scenario, specifically in discretionary categories.

Context:

After showing some signs of stabilisation in Q3FY22, crude & palm oil prices (both up ~60% YoY), started shooting up from February-end due to the Russia-Ukraine crisis. This resulted in another steep increase in inflation for consumer companies. However, copra & tea prices were down 10-20% YoY.

Our Perspective:

Our FMCG coverage universe is expected to witness 13.1% revenue growth almost entirely driven by pricing. Volume growth is likely to be positive for cigarette companies given lifting of restriction on mobility has perked up cigarette volumes to above pre-Covid levels. Moreover, tea category is likely to witness volume growth in Q4 with dip in procurement prices. We believe some companies would utilise the opportunity to export wheat with the increased demand after Russia-Ukraine Crisis. FMCG companies have taken price hikes to the tune of 10-15% over the last six months to pass on steep increase in commodity inflation. Most FMCG companies are likely to witness 200-400 bps gross margin contraction due to continued inflation in crude, palm, milk & wheat. We believe FMCG companies will cut down advertisement spends to protect margins, which has adversely impacted new product launches. Enhancement of direct distribution network continues. We expect a 25 bps contraction in operating margin for our coverage universe. Further, taxation for Dabur, HUL, Colgate & Marico is likely to go up with expiry of tax benefits. We estimate net profit growth of 5.7% for our coverage universe in Q4FY22E.

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