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Price cuts on the cards with sharp dip in commodities - FMCG Preview
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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