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Business News/ Industry / Retail/  FMCG sector: Rural demand weakness drags Q3 revenue growth; prefer ITC, Emami, Asian Paints, Britannia: Centrum Broking
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FMCG sector: Rural demand weakness drags Q3 revenue growth; prefer ITC, Emami, Asian Paints, Britannia: Centrum Broking

Paints and cigarettes segment witnessed resilient volume growth, while it remained muted for hair oil, HFD (Health and Food Drinks) and BPC (beauty and personal care) segments.

Most FMCG companies saw sequential decline in major input raw material costs, which resulted in an uptick in gross margins in Q3FY24. (Photo: Mint )Premium
Most FMCG companies saw sequential decline in major input raw material costs, which resulted in an uptick in gross margins in Q3FY24. (Photo: Mint )

The consumer staple companies ended the third quarter of FY24 with muted revenue growth on the back of weak consumer sentiments weighing on mass demand, mild winter, sticky food inflation, increased competitive intensity, and uneven economic recovery. 

Though inventory loading was done in September and October expecting a strong festival and winter season ahead, however anticipated demand belied industry expectation, Centrum Broking said in a report.

The paints and cigarettes segment witnessed resilient volume growth, while it remained muted for hair oil, HFD (Health and Food Drinks) and BPC (beauty and personal care) segments. Companies remain hopeful on rural recovery and higher contribution from NPD or adjacencies to drive top-line in Q4.

“We note staple companies struggled to report low single digit volume growth, on account of subdued demand coupled with resurgence of regional or local competition in hair oils,  detergents, soaps and packaged food. Despite the high base, volumes remained healthy for paints and cigarette companies," said the brokerage report.

Also Read: Stocks to buy: ITC, Britannia, Dabur, Asian Paints among 8 FMCG stocks picks after Q3 results

Further to drive volumes companies are focusing on improving distribution in Tier 2/3 cities and support by adding extra grammage in value-for-money packs (LUPs). 

Most FMCG companies saw sequential decline in major input raw material costs, which resulted in an uptick in gross margins. However despite price cuts or grammage increase and increased trade promotions and ad-spends most companies reported improving EBITDA margin trend.

Analysts expect margins of these companies to remain stable or may not decline further.

“With elevated A&P spends on account of rising competitive intensity and support NPD resulted in lower to stable margins, while increased leaf tobacco exports impacted margins for Tobacco companies. We expect savings on account of lower commodity costs to be reinvested in consumer promotions and ad-spends to lift volume growth," the brokerage said.

Also Read: Indian consumer packaged goods firms balanced volumes with price hikes in 2023: Bain & Co report

Most companies remain hopeful on the government’s impetus on driving income for rural areas. We need to be watchful on tepid/prolonged rural recovery, and spurt in private consumption to actually influence overall demand, Centrum Broking noted.

Further digitalisation, distribution expansion and increase in government spending on the back of elections are likely to help in rural recovery. 

Centrum Broking believes the sector valuations appear to be rich, with improving outlook. 

It prefers ITC, Emami, Asian Paints and Britannia Industries, expects bounce back in rural areas to influence performance for Dabur India and Bajaj Consumer Care positively.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 16 Feb 2024, 11:10 AM IST
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