HUL, ITC, Nestlé, Britannia are growing revenues by increasing prices; can this be sustainable?

In spite of a steady decline in volume uptake, the country’s fast moving consumer goods (FMCG) majors have managed to pull off healthy top-line growth in the December quarter. From Hindustan Unilever (HUL) to ITC, leading FMCG players reported an 8-17 per cent rise in their revenues. And a majority of them, such as ITC, HUL, Nestlé and Britannia, expanded their Ebitda (earnings before interest, tax, depreciation and amortisation) margins, too.

A deeper look into their numbers, however, indicates subdued market sentiment. For most FMCG majors, the healthy top-line and margin growth were fuelled by steep price hikes and meagre volume offtake.

Take HUL, for instance. The country’s largest pure-play FMCG firm reported a 16 per cent jump in its revenues, but its volumes grew just 5 per cent—implying a double-digit rise in average prices of products in Q3FY23. Biscuits major Britannia’s net revenues surged 17.4 per cent on a meagre 1 per cent growth in volumes as it resorted to a cut in pack sizes apart from hiking prices directly. While Tata Consumer Products’ net revenues surged 8 per cent, its gross margins contracted by 217 basis points (bps). Packaged foods major Nestlé India’s net profit and sales rose 66 per cent and 14 per cent, respectively, but its volume uptake remained muted. While better traction in cigarette sales helped ITC’s performance, high raw material prices remained a key concern for it, said analysts at Nuvama Institutional Equities.

Data shows that the slowdown in the rural market and steep commodity prices have resulted in a downward spiral that is troubling FMCG companies in finding the right product-price mix. As per market research firm Nielsen, in Q3FY23, volume offtake in the rural market declined by 6 per cent compared to the 3 per cent de-growth in urban areas, resulting in a decline of 4 per cent across the country. But double-digit price hikes across the sector boosted FMCG value growth in the December quarter—by 10 per cent in the urban market and 4.5 per cent in the rural market—with cumulative growth pegged at 8 per cent.

In fact, Dabur India could grow its top line by only 3.4 per cent due to its greater exposure to the rural market, compared to other leading players. As a result, its gross margin contracted by 283 bps.

According to Sanjiv Mehta, MD & CEO of HUL, key commodities like crude oil, soda ash, food ingredients, etc., continue to witness 100 per cent inflation compared to December 2020. And a depreciating rupee has further added to the woes. Moreover, a delayed winter impacted winter product sales during the quarter. Suresh Narayanan, CMD of Nestlé India, voiced similar concerns as milk prices continued to rise, with double-digit increase in its prices in the past one year.

After suffering from higher input costs and poor volume offtake, companies like HUL remain “cautiously optimistic” as multiple factors have the potential to further impact a recovery that is slowly gathering pace. According to analysts from Nuvama, with the growing chances of El Niño weather events—which may result in a rain-deficit monsoon—the recovery in rural India, which contributes 36 per cent of total FMCG sales, could derail. A rain-deficit monsoon in certain states may adversely impact harvests, resulting in lower household incomes and, consequently, lower FMCG sales.

@arndutt