NEW DELHI, Apr 5
Fast-moving consumer goods (FMCG) companies may have to contend with slower topline growth in the March quarter of FY24 as demand trends have remained sluggish, companies as well as analysts said.
On Thursday Dabur said it expected mid-single digit percentage revenue growth in Q4FY24 compared to a 7% rise in the December-quarter and 7.3% jump in Q2FY24. Dabur’s shares fell 4.5% and were on track for their worst day since May 2023, closing at Rs 505.95 on the BSE, down 4.77% over Wednesday’s close.
Gross margin expansion may also be weak during the quarter as input prices have turned inflationary, experts said. The trend marks a reversal from the past few quarters when commodity inflation was largely benign. Firms had taken price cuts and upped ad spends, which was visible in Q3FY24.
Key inputs such as crude oil, palm oil, coffee, cocoa and sugar have seen a sharp surge in their prices in the March quarter. This inflationary trend may continue into FY25, analysts said, as global supply concerns weigh on these commodities. While price hikes are not likely to be visible in Q4FY24 or even the first of FY25, the second half of FY25 may see companies test their pricing power, as the demand environment is likely to stabilise. “Demand has remained sluggish in the March quarter. Rural growth picked up fuelled by price rollbacks in staples, which led to the gap between rural and urban narrowing. We expect consumption in the coming months to pick up as the rabi crop harvest and monsoon forecast remain normal,” Dabur said in its Q4 update on Thursday. In Q3, Dabur’s CEO Mohit Malhotra had said that his company saw rural demand outpace urban demand by 200 basis points as distribution expansion remained robust and staple items saw offtake on the back of price cuts and trade promotions. NielsenIQ numbers for January and February 2024, suggest that rural markets on an average have grown by 8.8% in terms of volume versus nearly 6.7% urban markets during the period. March 2024 numbers are not out yet.
Analysts say that the growth in rural markets for the January-February 2024 period is optically high, coming on a low base. “Our channel checks suggest that rural is not out of the woods yet. Rural will take time to recover,” Sachin Bobade, vice-president, research, at Mumbai-based brokerage Dolat Capital, said. Nielsen in February had indicated the gap between urban and rural markets was beginning to narrow from levels of about 5-6% earlier to around 1-2% now. The FMCG industry derives over a third of its total sales from rural areas, while the rest comes from urban areas. Analysts and companies maintain that for the FMCG industry to do well, rural markets will have to consistently do better in terms of volume growth.
“The pace of gross margin expansion in Q4 (FY24) will be small for FMCG companies. Shipping costs and delays due to the Red Sea crisis may also have a slight impact on operating margins in select cases during the quarter,” Abneesh Roy, executive director at Nuvama Institutional Equities, said.
Analysts expect gross margin expansion in Q4 to be around 100-200 basis points for most FMCG firms, with operating margin expansion likely flat as companies have kept their advertising and brand-building efforts going amid competition from small players. “We believe that the volume growth for FMCG companies has bottomed out. Q4 will be the last of the quarters where companies are likely to report weak volume growth. We anticipate a steady improvement over FY25 and FY26, though some pricing action could be there as raw material prices inch up,” analysts at Motilal Oswal said in a note on Thursday.
