Consumer packaged goods (CPG) firms are expected to post muted earnings growth for the April-June quarter as volumes failed to pick up even as prices fell. However, margins of consumer companies are expected to expand, benefiting from cooling inflation.

A Mint survey of four brokerages—ICICI Securities Ltd, Motilal Oswal Financial Services Ltd, India Infoline Ltd (IIFL) and Prabhudas Lilladher Pvt. Ltd—shows that analysts estimate profit growth of 7-14% and sales growth of 4-7.5%. Kotak Institutional Equities expects earnings ex-ITC (excluding ITC Ltd’s) to be in a higher range.

“It’s been a muted quarter with not much value or volume growth," said C.K. Ranganathan, managing director, Cavinkare Pvt. Ltd, manufacturer of Chik and Meera shampoo.

“The underlying demand scenario maintains a status quo with no signs of improvement in the urban as well as rural markets," said a 8 July IIFL Institutional Equities report.

“Broadly, consumption trends continue to remain sluggish across categories and geographies," said a Motilal Oswal preview report.

Revenue growth has slowed down due to a number of factors, including a cooling-off of rural growth. While rural growth is still ahead of urban growth, the gap between the two is narrowing, said analysts. “Unseasonable rain and reduction in National Rural Employment Guarantee Act allocations has impacted rural incomes; monsoons will be a key determining factor for recovery in demand," said analysts Amnish Aggarwal and Gaurav Jogani of Prabhudas Liladher in their June quarter preview report.

Revenue growth also slowed as companies took price cuts in several categories such as soaps, detergents, hair oils and paints, said a 3 July Kotak Institutional Equities report. Revenue growth could also be hurt by one-time factors such as the withdrawal of Maggi and seasonality of ITC’s agri business, said analysts.

Nestle India Ltd will see a 10% volume fall in domestic business from sales loss of one month due to the Maggi recall, said the Kotak Institutional Equities report.

Revenue growth of CPG firms in the first quarter of the fiscal at 4.2% is expected to be lower than the preceding quarter’s 4.9% and much lower than the 15.2% seen in the same quarter a year-ago, said brokerage Prabhudas Lilladher in its preview report while noting that the demand scenario continues to remain benign.

Margins, though, are expected to expand, benefiting from cooling crude and other raw material prices. For instance, the price of palm oil and crude oil—a key input for Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL)—was lower by 7.45% and 45.86%, respectively, year-on-year (y-o-y). The price of copra, the key input for Marico Ltd, was lower by 36.01% y-o-y, according to Bloomberg. But, compared to a quarter ago, select raw material costs have started to rise.

“We expect aggregate operating margin for personal care companies under our coverage to expand by 130 basis points over the year-ago quarter. This shall be primarily led by GCPL (223bps), Dabur (138bps) and HUL (115bps)," said analysts Anand Mour and Aniruddha Joshi of ICICI Securities in a 14 July report. A basis point is one-hundredth of a percentage point.

India’s largest CPG firm by sales Hindustan Unilever is expected to report a 9.7% rise in sales led by 6% volume growth. “We estimate expansion of 230bps in gross margins and 166 bps in operating profit margins as price cuts and higher advertising and promotion spends neutralize part of gains from lower input costs," said analysts at Prabhudas Lilladher.

The quarter saw a number of new launches which include Hindustan Unilever’s Fair & Lovely BB cream, Britannia Industries Ltd’s Pure Magic Chocolush and Dabur India Ltd’s launches of Vatika B&B shampoo and a baby massage oil with olive and almonds.

With negative inflation and deceleration in revenue growth, the outlook for consumer goods makers will depend on volume growth prospects and demand pickup, analysts said. “We will be closely watching out for cues from management commentary if there is any cue visible for demand scenario to improve on the ground. Besides, we will also be looking at confirmation for sustainability of margin expansion in the coming quarters, as there appears to be limited increase in competitive intensity despite benign raw material prices," said the analysts of ICICI Securities.