Fast moving consumer goods companies were hit hard over the last couple of years as surge in commodity costs forced them to raise prices across categories. Now, even as pricing pressures have reduced, demand recovery, especially in the rural markets, remains subdued and officials at Hindustan Unilever expect recovery to be only gradual.
The largest consumer goods maker in the country reported a net profit of Rs 2,717 crore in the July-September quarter, up around 4 per cent from a year ago profit of Rs 2,616 crore. Sales in the second quarter also rose around 4 per cent year-on-year to Rs 15,027 crore from Rs 14,514 crore.
Underlying volumes (number of units sold) for the maker of Bru coffee and Surf detergent grew just 2 per cent in the September quarter, while pricing-led growth is also tapering off as commodity prices reduce and the company is passing it on through price cuts and promotions.
"We are in an inflation to deflation cycle in three-fourths of our business, which is home and personal care. Consequently, we have taken our prices down. The transition from high to low prices in the market takes time. Our expectation is that this will be a gradual recovery over the next few quarters, because we expect prices to be flat to negative even in the next quarter," said Rohit Jawa, MD and CEO of HUL.
He noted that the company's volumes had grown in mid-single digits in the home and personal care business. Foods and refreshments business saw a mid-single digit decline in volumes.
HUL's rival Godrej Consumer Products, in its recent commentary, had also pointed to mid-single digit volume growth in home care and low-single digit volume growth in personal care.
Dabur India too has indicated "gradual recovery" and said it expects to register mid-to-high single digit growth in the quarter gone by.
The gradual recovery across the FMCG market is being led by urban demand, while rural consumption continues to lag.
A patchy and slightly deficient monsoon this year may put further pressure on rural markets. How that actually pans out will have to be watched out for companies including HUL.
Rising competitive intensity is another problem FMCG companies are facing. As inflationary pressures ebb, smaller players are re-entering the market and that could put further downward pricing pressure on larger companies like HUL, while also pushing advertising and promotional spends higher.
"Overall, the input costs are softening as we see commodities moderating. With that, we have seen small players participating more in the market, many of whom may have vacated the market at the peak of inflation. These small players in certain categories like detergent bars and tea are growing faster than larger players," said Ritesh Tiwari, chief financial officer of HUL.
In tea, for instance, premium end of the market saw more inflationary pressures in the past, which led to market downgrading to loose tea or mass market brands. So in tea and categories like detergent bars, the mass end of the market has been growing at a faster clip, added Tiwari.
In coffee, it is the other way around as inflationary pressures continue and rising prices have put pressure on volumes in the market.
While there may be heightened competitive pressures in the mass end of the market, Jawa said the premium categories were growing at almost twice the overall pace for HUL. Therefore, the company intends to "premiumise more aggressively" and ensure its products are available in the relevant channels.
Overall, expectations of a slow recovery in volumes and pricing-led growth likely to remain negative in the next quarter if commodity prices remain where they are, could be a concern for the market.
The third quarter will likely see tailwinds from festive season, sustained buoyancy of services and government's thrust on capex, said Amnish Aggarwal, head of research at Prabhudas Lilladher.
