The FMCG segment continues to face tepid rural demand which may continue to pose challenges for the segment. In the recent quarter Q3 of the FY 2023 the urban demand also remained the same and not much change was seen from the Q2 of the FY 2023. As per a recent report by HDFC Securities the volume CAGRs of companies is not expected to show any meaningful difference from those in Q2. As per the report FMCG companies are expected to deliver growth of around 9 percent on YoY basis. Packaged food is expected to sustain strong growth, primarily led by price hike.
As per the report the winter product portfolio could not see enough pick-up due to a delayed winter; skin care portfolio, hence and could see some pressure. Other discretionary consumption was also weak particularly after the festive season. In compared to this most international geographies continued their growth momentum. HUL, Nestle, Britannia, ITC and Jubilant are expected to deliver double-digit YoY growth.
The HDFC Securities report points out that though commodity prices have eased only a sequential improvement is expected in gross margin for most companies and the operating margin print is still expected to look weak on a YoY basis. The report further observes that demand in the FMCG segment will improve gradually instead of the general expectation of a quick bounce-back. High inflation has dented the net income level of bottom of the pyramid consumption. It is expected that if inflation softens then affordability in rural will start helping the rural consumption at the end of Q4FY23 or early Q1FY24. Experts at HDFC Securities expect that volume recovery for FMCG companies will also happen accordingly.
The pace of new launches by FMCG brands has also seen acceleration and should help in aiding up revenue growth. At the same time price and promotions by the FMCG players along with rural recovery will be the key drivers for the growth of the market. As per the report margin recovery will be faster than revenue recovery and most FMCG companies will be able to expand operating margin in the next two quarters onward assuming that there are no macro challenges in the commodity basket.
It is expected that the near-term operating growth for the FMCG companies is expected to be healthy however competitive landscape is rapidly changing and evolving consumer preferences can impact market share for leading brands.
