FMCG: Can Budget 2024 help improve demand conditions?
Operating profit likely to be ahead of revenue growth.
Key highlights
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- Gradual sequential improvement in domestic businesses
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- International businesses remain key growth engines
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- Out-of-home consumption impacted by intense summer
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- Operating margins expected to improve on account of stable commodity prices
- Upcoming budget and monsoon follow-through remain key factors to watch
Early trends from the quarterly updates of the FMCG sector point towards a gradual demand recovery, sequentially.
While Dabur India (CMP: Rs 606; Market capitalisation: Rs 1,07,482 crore; Rating: Overweight) mentioned about rural growth picking up, Marico (CMP: Rs 615; Market capitalisation: Rs 79,665 crore; Rating: Equal weight) highlighted modest domestic volume growth, inspite of a certain degree of wholesale channel destocking to ensure smoother direct reach expansion.
While domestic consumption businesses are still looking for a firm foot, both the companies have reported a better growth trend for their respective international businesses, currency headwinds notwithstanding. With commodity prices stable, both the managements anticipate operating profit to grow faster than the top line.
Dabur: Food business continues to do well
The company’s international business (25 percent of sales) is expected to remain a growth engine. This can help Dabur to post high single-digit consolidated revenue growth in Q1. On the other hand, the India business is expected to record mid-single digit volume growth.
The home and personal care and healthcare segments are expected to grow in high-single digits. The key laggard of the quarter was travel and out-of-home consumption products, which got hit by intense summers. This, in particular, impacted the beverage segment. That said, the food business continues to do well and Badshah Masala is expected to post strong volume-led growth in high teens.
Marico: Aided by food and digital-first brands
One of the reasons for the company’s underperformance is the tweaks in distribution strategy, aiming towards direct reach. This has visibly impacted the core portfolio of hair oils, among other reasons. The flagship Parachute coconut oil has posted low single-digit volume growth in Q1, but according to the management, it is likely to pick up through the rest of the year, given the healthy trends in offtake growth.
Value-Added Hair Oils also had a soft start to the year due to the competitive headwinds in the bottom-of-the-pyramid segment, and the mid and premium segments fared relatively better.
However, food and digital-first brands have been able to execute well. Further, as international business delivered double-digit constant currency growth, the management pencils in high single-digit consolidated revenue growth in Q1.
Outlook
FMCG companies have been pointing towards green shoots in rural demand recovery in the last two quarters. Last Q4 results and positive guidance helped some of the FMCG stocks to perk up more than 20 percent from the mid-April levels. That said, the sequential growth, though encouraging, is still modest, compared to historical demand trends.
More credible evidences are needed to confirm the growth pickup in the low-priced consumption categories. Hence, the upcoming budget and follow-through of monsoon remain key events which can potentially accelerate the propensity for rural spending.
The positive takeaway for the sector is the improving margin profile and the shades of pricing power seen for select categories. Not surprisingly, leading companies continue to invest in brand-building.
Given this context and the recent run-up in stock prices, we remain selective in the FMCG universe. We prefer Dabur (49x FY26e earnings), compared to Marico (54x FY26e earnings), and would revisit our recommendations, post Q1 results and analyst calls.
Bymoneycontrol
