scorecardEasing commodity prices & softening inflation likely to boost Q4 earnings of FMCG companies
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Easing commodity prices & softening inflation likely to boost Q4 earnings of FMCG companies

Easing commodity prices & softening inflation likely to boost Q4 earnings of FMCG companies
Business3 min read
  • Commentary from the FMCG companies suggests gradual improvement in demand in the March quarter.
  • Analysts say that commodity prices have declined in the last six months, which is likely to improve gross margins of FMCG companies.
  • Adding to it, retail inflation also fell to a 15-month low of 5.66% in March, mainly due to a decline in food prices
  • IMD’s forecast that the country will receive normal monsoon rains this year despite evolving El Niño conditions is another reason for FMCG companies to celebrate.
Fast-moving consumer goods (FMCG) companies are expected to report robust revenue and net profit growth for the March quarter, all thanks to falling commodity prices, cooling inflation and price cuts effected by FMCG players.

A report by ICICI Securities estimates the FMCG segment will see a 9.8% year-on-year revenue growth in the fourth quarter of FY23 led by a mix of volume and pricing. Analysts at IIFL Securities also expect aggregate sales for the sector to grow at 10.4% on year, with gradual recovery in volumes for the FMCG segment. They also expect profit after tax to grow at 14.4% over the year-ago quarter.

“With softening of major commodity prices, FMCG companies have taken price cuts and grammage increases in the last six months. This is expected to result in a volume uptick in Q4FY23. However, rural demand conditions still remain soft compared to urban demand,” said a report by ICICI Securities.

Analysts say that prices of key raw materials for the FMCG sector have declined in the last six months, which is likely to improve gross margins of FMCG companies. “Average palm oil, crude and coconut oil prices have been down 35%, 16.1% and 12.7%, respectively, compared to corresponding quarter,” said a report by ICICI Securities.

Green shoots emerging despite near-term consumption pressures
Commentary from the FMCG companies also suggests gradual improvement in demand in the March quarter.

In fact, the maker of Parachute brand of coconut oil, Marico, in its recent Q4 update mentioned that the FMCG space is witnessing gradual recovery with year-on-year volume trends improving in each quarter. It highlighted that easing commodity prices was a key factor aiding the sector’s growth. However, the company underlined that normal monsoon would be critical for future growth.

“While urban and premium categories were stable, easing of broader commodity inflation bodes well for overall consumption trends, especially in rural markets. While a more visible and sustained recovery in FMCG demand is anticipated in the coming quarters based on a variety of improving macro indicators, a healthy monsoon season will be critical for the same to materialise,” said Marico in a BSE statement.

Hajmola maker Dabur India also indicated improvement in its demand across markets.

“The demand trajectory across both urban and rural markets in India has shown a slight improvement sequentially, although it falls short of a full recovery. While urban markets have returned to positive volume growth, rural markets still remain muted,” said Dabur in an exchange filing.

“Despite near-term consumption pressure, there are some green shoots which are emerging such as moderating inflation, improving consumer confidence and increase in government spending,” added Dabur.

India’s retail inflation fell to a 15-month low of 5.66% in March, mainly due to a decline in food prices, government data showed. The inflation figure is also within the Reserve Bank of India's upper tolerance level of 6%.

IMD’s monsoon forecast adds to optimism
The India Meteorological Department’s (IMD) forecast that India will receive normal monsoon rains this year despite evolving El Niño conditions is another reason for FMCG companies to celebrate.

Showers during the June-September rainy season is likely to be 96% of the long-term average, according to IMD.

El Niño is a climate pattern in the Pacific Ocean that influences climate conditions and could create a deficient monsoon.

“Forecast of a normal monsoon by IMD is positive news for the FMCG sector. A normal monsoon should aid rural revival specially where over a third of FMCG sales in India come from rural areas and this would help in overall rural demand improvement,” said Avinash Pathak, research analyst at LKP Securities.

Millions of farmers in the country depend on the monsoon to sow their crops and earn their livelihood. It is directly linked to rural demand thus impacting sectors like FMCG and auto.

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