FMCG shares under pressure. HUL, Godrej Consumer, Nestle down 4%

Fast-moving consumer goods (FMCG) stocks were under pressure with most frontline stocks falling as much as 4 percent on growth concerns. Hindustan Unilever (HUL), Godrej Consumer Products, Marico, Nestle India, Britannia Industries and Dabur India fell between 2 percent and 4 percent over BSE in trade during Tuesday.

12:13 pm; The S&P BSE FMCG Index is down 1.8 percent at 13,064 points, compared to a 0.48 percent decline in the S&P BSE Sensex. So far this year, the consumer goods index is down 5 percent, versus a 2 percent drop recorded by the benchmark.

The sustained increase in raw material prices continued to wreak havoc in the December quarter (Q3Y22), as gross margins for most FMCG companies felt tight. Marico saw a 317 basis point contraction in gross margins despite the slowdown in coconut pulp prices from their highs. Meanwhile, HUL and Nestlé saw their gross profit margin contract by about 200 basis points due to significant price increases and product mix enhancements.

ICICI Securities believes that commodity inflation not only affected margins but affected volume growth as rural consumers shifted to lower quality brands/lower stock-keeping units (SKUs).

“There has been no indication of lower prices for imported commodities (oil-based commodities, palm oil, etc.) and this will continue to affect growth and margins over the medium term (two to three quarters). Thus, we remain cautious about Growth outlook It is important to note that valuation multiples for consumer goods companies have begun to contract as operating margins peak amid slowing sales growth,” the brokerage said in its third-quarter earnings report.

Despite the correction, analysts at HDFC Securities expect more valuation risks in the next few years. Analysts believe that the category leaders will not be able to maintain high market shares due to intense competition from niche players outside of the Internet / D2C (direct-to-consumer).

“Margin expansion for most companies will be muted, as many have already arrived,” the brokerage said in a segment report. “A large portion of cost control has already been put in place. Firms should prioritize growth above margins.”

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