Weak rural demand to hit earnings

High prices of everything from daily essentials to auto fuel continued to weigh on consumers’ wallets hurting rural households, according to brokerage firms.

Packaged consumer goods makers may see another “subdued” quarter as weak rural demand and inflation weigh on disposable incomes, said Jefferies India.

“The impact of high inflation and sluggish rural trend would be visible on volume growth, though product price hikes would drive double-digit revenue growth. Gross margins and Ebitda margin would continue to be at a multi-quarter low as correction in key input prices is yet to show up,” analysts at the financial services company said.

Jefferies expects the FMCG sector to post 5%-plus volume growth, while a few companies may see a decline from the year ago. Despite weak volumes, revenue growth for companies under Jefferies’ coverage, excluding ITC and Varun Beverages, will come in at 11% year-on-year, on the back of product price hikes.

Companies, especially detergent, food, personal care, salt, and biscuits manufacturers are raising prices to counter inflation over the last few quarters. However, in a relief to consumers, edible oil companies cut prices by ₹10-15 a litre in August, in addition to the ₹15-25 drop in prices in the past three-four months. Companies such as Hindustan Unilever announced price cuts across some stock keeping units (SKUs) for soaps in western India. Godrej Consumer Products, too, cut prices in select SKUs for soaps.

“Sales growth in Q2 FY23 will largely be led by price hikes as volumes for most categories are negatively impacted by grammage reduction, high consumer price index inflation, and a sustained slowdown in rural demand. However, the prices of key commodities such as crude and palm oil have eased in the recent weeks, but they are unlikely to benefit margins in 2QFY23 as the decline came in only towards the end of the quarter,” Motilal Oswal Financial Services analysts said in a preview of the September quarter earnings. Consumer goods companies had reported 10.9% rise in June quarter sales. However, volumes remained under pressure, dipping 0.7% year-on-year, but improved sequentially, according to data released by NielsenIQ in August.

The research firm said urban markets witnessed a revival in volume growth while rural markets saw slower recovery n the quarter. Companies said demand trends in the September quarter mirrored those of the previous quarter as inflationary pressures continued to impact household expenses, but demand improved in September led by the festivities.