FMCG Q3 preview: Rural consumption holds up, but urban slump may weigh on consumer goods companies

A delayed winter added to weak urban demand woes and inflationary pressures, and several consumer goods companies are expected to report low single-digit revenue growth and margin contraction for the October-December period.

“The demand slump persisted in Q3FY25 despite festive concentration. Inflationary stress asks for price hikes, which further affect demand. Expected respite from winter care offerings was also missing, given the delayed and weak winter," Nitin Gupta, research analyst at Emkay Global Financial Services, said in a sector preview report dated 3 January.

“ITC, Marico, and Bikaji are the only players to report double-digit year-on-year revenue growth. Margins are likely to be weak due to inflationary stress, lower operating leverage, weak sales mix, and need for sustained advertising," he added.

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On Monday, Mumbai-based consumer goods company Marico Ltd said it may report a sequential increase in volume growth for the December quarter helped by rural demand despite price increases.

Marico increased the price of its flagship Parachute coconut oil brand towards the end of the quarter. And volume growth for its edible oil brand Saffola held “firm" despite steep price hikes to counter rising vegetable oil prices, the company said.

“During the quarter, the sector witnessed steady demand trends on the back of improving rural consumption and stable sentiment in urban vis-à-vis the preceding quarter. Amidst this backdrop, the domestic business posted a sequential uptick in underlying volume growth with sustained market share gains across key franchises," Marico said in an earnings update on Monday.

The company, however, anticipates a year-over-year contraction in its gross margin due to rising input costs, notably for vegetable oils and copra, from which coconut oil is extracted. “Consequently, we expect modest operating profit growth on a year-on-year basis," the company said. Marico is set to announce its third-quarter earnings later this month.

More price hikes on the horizon

Expectations for the overall packaged consumer goods industry aren’t as optimistic, with analysts predicting that the slowdown in urban demand will continue for another two to three quarters.

For the December quarter, analysts at Nuvama Institutional Equities expect fast-moving consumer goods companies to report low-to-mid single-digit volume growth. “Urban demand scenario is challenging due to inflationary pressures, low wage growth, and higher housing rental costs," the brokerage said in a report late last week.

Nuvama expects the FMCG sector’s third-quarter earnings before interest, taxes, depreciation, and amortization—or ebitda, a key measure of operational performance—to decline 1.6% year-on-year.

Several FMCG companies had already warned about a slowdown in urban consumption in the September quarter. Demand from rural markets has continued to grow ahead of urban markets in volume terms, per industry data.

Also, consumer goods companies were compelled to hike prices during the December quarter to mitigate high input costs.

Last month, Mumbai-based soap and hair colour maker Godrej Consumer Products said it increased the prices of its soaps and reduced the grammage of key packs during the December quarter as palm oil prices surged. Soaps account for a third of Godrej Consumer’s standalone business revenue.

“Pricing growth is back to low-to-mid single-digit hikes for staples companies. Further price hikes are likely in Q4FY25," the Nuvama analysts said. “Margins in soaps, snacks and tea are under high pressure due to almost 30% year-on-year inflation in palm oil and tea," they said.

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‘Insufficient price hikes’

On Friday, Dabur India, maker of Vatika shampoo, said rural consumption of consumer goods was resilient and continued to grow faster than urban consumption in the December quarter.

Dabur, which has increased prices and ramped up cost-efficiency programmes, expects low single-digit growth in consolidated third-quarter revenue and its operating profit to remain nearly unchanged from the corresponding year-ago period.

“Consumption trends were mixed in the third quarter," said analysts at brokerage Motilal Oswal.

“Staple companies are likely to witness a muted quarter amid sluggish urban demand, weak uptake for the winter portfolio, and high palm oil prices impacting the personal-wash portfolio (grammage reduction)," the analysts said in a report on Monday. 

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“Paint companies are impacted by a delayed monsoon and an early festive season. Demand has remained soft after the festive season, and the third quarter is expected to remain weak across companies. Value growth will continue to lag volume growth," they added.

Motilal Oswal expects FMCG companies selling daily staples to report revenue growth of 5% year-on-year for the December quarter. “With high commodity prices (particularly in the agri basket) and insufficient price hikes, gross margin is expected to see pressure for most categories," the analysts said.

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