Over the last one year, as commodity prices rose sharply, fast-moving consumer goods (FMCG) companies were hit hard as rural demand dipped considerably. With inflation cooling and companies passing that to consumers through price cuts and promotions, the hope was growth would rebound. However, the June quarter earnings of Hindustan Unilever suggest the sector is not out of the woods yet.
With companies reducing prices in certain categories, price-led growth has reduced. At the same time, volumes (units sold) are yet to see a good recovery. Much of the growth in the market is still led by urban demand, and the uncertainty around monsoon and the possible impact of El Nino would mean rural demand pick up could still be some time away.
"Near-term operating environment continues to be volatile with weather-related risk. We need to be watchful of the progress of the monsoon and any impact of El Nino on cropping and rural demand," said Ritesh Tiwari, chief financial officer of Hindustan Unilever.
He expects market volumes to recover gradually due to high levels of cumulative inflation and as typically consumption habits recover with a lag.
HUL, on Thursday, reported an 8 per cent year-on-year growth in standalone net profit in the first quarter at Rs 2,472 crore, versus Rs 2,289 crore, a year ago. Quarterly revenue for the maker of Dove soap and Bru Coffee was up 7 per cent to Rs 14,931 crore from Rs 14,016 crore, a year ago.
The company's volume growth in the June quarter was at just 3 per cent. In comparison, volumes had grown 4 per cent in the January-March quarter and 6 per cent in the April-June quarter of 2022.
While categories like oral care, skincare and colour cosmetics saw double-digit volume growth, beauty and personal care volumes grew in mid-single digits. Skin cleansing had a "modest volume-led growth" but foods and refreshments saw flat growth in the June quarter. The company has had to battle several challenges in the foods and refreshments space. In tea, for instance, high prices in premium tea led to consumers downgrading to loose tea. Unseasonal rains impacted ice cream consumption in the peak summer season.
"FMCG markets are recovering gradually although the operating environment remains challenging," said Rohit Jawa, the CEO and MD of HUL, who took charge of the company in June this year.
In the next couple of quarters, Tiwari expects price-led growth to taper off further with sequential price reductions.
"If commodities remain where they are, we expect our price growth to be near flat or marginally negative for the next couple of quarters," Tiwari added.
The company will be hopeful that the price reductions will lead to volume recovering strongly in the coming months.
HUL's results for the quarter are in contrast to upbeat commentary from its rivals recently.
Dabur is expecting its revenues in the June quarter to grow at 10 per cent. In its recent quarterly update, Dabur said trends in both urban and rural markets had shown signs of improvement. Sequential moderation in inflation had positively impacted consumer spending power and was resulting in gradual improvement in offtakes in the industry, it had said.
Godrej Consumer Products said volumes in homecare segment are likely to have grown in double digits and higher than mid-single digits in personal care.
"In India, overall consumer demand remained steady as seen in the previous few quarters. Our organic business continued to deliver robust performance with double-digit volume growth," it said in its quarterly update.