The gross margin pressures due to high raw material prices will weigh on the profitability of most staples and discretionary companies in the quarter ended June 30, 2022. However, the underlying volume and value growth of most consumer companies are expected to be stable despite further inflation and associated price hikes.
According to analysts, staples would deliver low single-digit volume growth and high single-digit or double-digit revenue growth during the quarter, while the discretionary segment will continue to outperform staples on the revenue front.
The good news is that in the event of a sustained fall in palm oil and crude prices it could well be the bottoming out of margins decline and recovery-led earnings would be on the anvil from the second half of the year.
“We expect the discretionary pack to outperform staples on underlying three-year revenue CAGR — we estimate staples or discretionary (ex-ITC) pack to register 8.3%/12.6% 3-year revenue CAGR,” according to analysts at Kotak Institutional Equities (KIE).
Food and beverage categories should fare better than some home and personal care categories. “Raw material inflation would continue to impact gross margins for most companies, despite price hikes. We expect aggressive cuts in advertising and promotion spending to defend margins partially. Ebitda growth and profit after tax growth would be soft for most companies given gross headwinds,” they said.
Hindustan Unilever is expected to report 14% year-on-year (y-o-y) revenue growth and 3% underlying volume growth, Britannia’s revenue growth is expected to be 13% y-o-y led by flat volumes on a high base. Nestle is expected to report a 12% y-o-y revenue growth, while ITC’s FMCG portfolio is estimated to report 13% growth in revenues partly aided by recovery in the stationery business.
Dabur, Tata Consumer Products, Godrej Consumer Products and Colgate could report 6-8% revenue growth led by modest volume growth. Marico is expected to report a decline in volumes and value-led by weakness across the board.
Companies in the discretionary segment — paints, adhesives and jewellery retail are expected to lead growth. Modest acceleration is expected in the underlying volume/value growth of the paints and adhesives category in the first quarter.
Asian Paints would lead the pack with 19% value growth in domestic decorative paints, followed by Pidilite with 14% growth, Berger Paints with about 14% growth and Kansai Nerolac Paints with nearly 10%. “We expect Titan to register 15% three-year CAGR in jewellery sales and jewellery Ebit margin of 12.5%,” analysts at KEI noted.
