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Price cuts on the cards with sharp dip in commodities - FMCG Preview

ICICIdirect Research 11 Oct 2022 DISCLAIMER

What’s Buzzing

 

Our FMCG coverage universe revenue growth of 15.8% (ex-ITC 11%) largely driven by pricing growth. ITC is expected to continue to witness strong growth across segments considering lower sales in the base quarter of cigarettes, hotels & agri business. We estimate 10% volume growth in cigarette business along with better product mix. HUL, Nestlé, Tata Consumer & Zydus Wellness are estimated to report double digit revenue growth largely contributed by prices hikes taken in last one year. Volume growth is expected to remain in the range of 3-6% for these companies. 

Context

 

Despite a sharp correction in edible oil, crude & related commodities, FMCG companies have not taken any major price cuts during the quarter given most companies were holding high cost raw material inventory. The industry would continue to witness price led revenue growth in Q2FY23.

Our Perspective

 

High inflation has slowed down rural consumption in the last few quarters. We expect a dip in commodity inflation along with stronger agri growth to help the FMCG industry in regaining volumes in H2FY23. We also believe new product launches would accelerate given companies are expected to increase ad-spends with the dip in major commodity prices. Palm oil prices have declined 50% from the peak in May 2022. Further, crude prices are down 27% from the peak in June 2022. The dip in two major commodities has reflected in prices of derivatives & related commodities in the last few months. Though most FMCG companies were holding high cost inventory, we believe benefit of cooling down of commodity costs would reflect in margin improvement from Q3FY23 onwards. We estimate net profit growth of 11.8% for our FMCG coverage universe.

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