Fast-moving consumer goods (FMCG) companies are expected to witness pressure on volumes in the October-December quarter.
However, price hikes will help push up revenues, said brokerages.
The volumes may be impacted as persistent weak urban demand may play out in the performance of consumer companies in the third quarter (Q3) of 2024-25 (FY25).
“Our ground checks suggest that the demand environment for FMCG has not seen any meaningful improvement due to several factors,” HDFC Securities said in its report.
The brokerage pointed out that the macro environment remained subdued and some companies have undertaken inventory corrections.
“The largest modern trade player, Reliance, has also been implementing significant inventory optimisation measures, which has reduced offtake from FMCG companies,” HDFC Securities added in its preview note.
Rising agricultural commodities prices are expected to impact companies in Q3FY25 as well, affecting gross margins of packaged goods companies.
“In agri-commodities (barring skimmed milk powder and sugar) prices of most commodities have witnessed inflation with wheat and barley prices up 15 per cent and 11 per cent Y-o-Y, respectively.
"Coffee and copra continue to witness inflation with prices up 65 per cent and 39 per cent Y-o-Y, respectively,” Antique Stock Broking said in its note, adding that higher agricultural commodities prices would impact companies like Nestlé, Britannia, Marico, and Tata Consumer.
Brokerages noted that companies have hiked prices in categories like soaps, tea, coffee, and edible oils.
Delayed winter is expected to hurt companies that have products with exposure to the season.
In its preview note on the sector, HDFC Securities said it expects gross margin to contract 160 bps year-on-year (Y-o-Y), due to inferior product mix (delayed winter impacting sales of high-margin personal products/health supplements range) and hyperinflation in predominantly agricultural commodities (wheat, edible oil, tea, coffee, copra, milk, etc).
It, however, expects pure play home and personal care companies could do better on the margins as most of the crude oil derivatives remain benign.
However, a continuous revival in rural demand would support FMCG companies in the quarter.
“We expect rural demand to continue to show improvement supported by above average monsoon (over 8 per cent of long period average) and strong Kharif harvest with overall production being one of the highest in recent years,” Nomura said in its report.
Corroborating this view, Dabur India in its quarterly update ahead of its results said that during the quarter, rural consumption was resilient and continued to grow faster than urban.
“While general trade was still under pressure, alternative channels like modern trade, e-commerce, and quick commerce continued to post strong growth,” the FMCG major said in its update.
Marico said in its update: “The sector witnessed steady demand trends on the back of improving rural consumption and stable sentiment in urban vis-à-vis the preceding quarter.”
Dabur India said that its consolidated revenue is expected to register low single-digit growth during the quarter ended December.
The maker of Parachute coconut oil added that its consolidated business delivered mid-teen revenue growth on a Y-o-Y basis.
Nomura noted that it expects rebalancing of channel mix to continue as quick commerce continues its aggressive penetration-led growth.
“We see limited impact from new-age brands on these platforms for FMCG companies as dark stores generally hold over 75 per cent inventory of products, which have high asset turns,” it added.
Healthy order books may lift bottom lines in capital goods sector
For India’s capital goods and engineering firms, analysts expect a steady profitability streak for the December 2024-ended quarter (Q3FY25) even as a slump in stock market valuation is seen over order book growth concerns.
The Bloomberg analysts’ consensus shows a double-digit growth likely for all three metrics — net sales, earnings before interest, taxation, depreciation and ammortisation (Ebitda) and profit after tax (PAT), for most companies in this segment (see chart).
Analysts with brokerage firm Motilal Oswal, in a December note, said, “We expect a 20 basis points (bps) year-on-year (Y-o-Y) expansion in Ebitda margin for our coverage universe.
"For Q3FY25, we estimate our coverage companies to report revenue growth of 19 per cent Y-o-Y, Ebitda growth of 21 per cent, and PAT growth of 26 per cent.”
Motilal Oswal noted that this growth expectation “Is despite selective order inflow improvement. Strong existing order books provide healthy revenue visibility for companies in the sector.”
For India’s largest engineering firm, Larsen and Toubro (L&T), the analysts expect a 20 per cent growth in consolidated revenue, and an 8.1 per cent core business Ebitda margin, up 40 bps from a year ago.
New order wins for companies in the capital goods and engineering space has been a mixed bag so far in FY25.
Analysts at Jefferies said, “Order flow growth tapered off post elections and investor concerns on growth/ valuations emerged.”
They added, “Actual (capital expenditure or capex) spend has been disappointing with the Centre’s capex declining 15 per cent in M7FY25.
"About 32 per cent Y-o-Y growth will be needed in November 2024-March 2025 for 5 per cent growth to be achieved in FY25E.”
It noted some improved visibility on government infra spend post Maharashtra elections.
Existing strong order book, however, is expected to aid profit numbers for Q3FY25, as analysts with Nirmal Bang, in a December 26 note, said, “We expect most companies under our coverage to deliver good growth on the back of execution of a robust order book.
"We expect top line growth of 19.8 per cent Y-o-Y for our coverage universe.
"We see a 51 bps Ebitda margin improvement.
"This is on the back of easing raw material costs and operating leverage benefits.”
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