Margin squeeze hitting FMCGs hard

Most FMCG firms are witnessing higher demand from urban areas with improved mobility. Also, discretionary spend is also coming back owing to higher outdoor activities and revival in the job market. However, rural demand remains subdued, which was the primary driver of growth for most FMCG firms in recent years

Bengaluru: Rising cost of key commodities and freight costs amid high fuel prices are likely to keep operating margins of FMCG majors under pressure in coming quarters. Moreover, waning demand- especially in rural areas poses another threat to volume-led growth, analysts pointed out.

In the September quarter, India's largest FMCG player Hindustan Unilever posted 11 per cent year-on-year growth in its domestic sales for the July-September quarter. But its volume growth remained below estimates, at four per cent, indicating a steep seven per cent price-led growth during the quarter. However, despite raising the product prices, HUL's operating margin dipped 46 basis points during the quarter. Sanjiv Mehta, Chairman & MD of the company said post the results announcement that while Indian consumers are optimistic about their long-term future, but their short-term outlook remains gloomy due to job losses, rising cost of living, apart from the direct impact of the Covid-19 pandemic on their lives.

Similarly, Nestle India witnessed a margin squeeze too as the firm's operating margin fell by 86 basis points despite price hikes in selected categories.

Most FMCG firms are struggling with multi-year high inflation due to rise in input prices. Global palm oil prices continue to hover at record high level, which is a key ingredient in soaps, industrial baking, and cosmetics. Also, freight costs have gone up five times as compared to pre-pandemic days, pushing up the cost for all commodities. "Commodity inflation has sustained for the past 3-4 quarters, impacting gross margin as companies have taken calibrated price hikes. We believe FY22 margin expansion will be limited (as compared to FY21) although companies have been passing the raw material pressure," HDFC Securities said in a note.

"Discretionary companies will be able to expand EBITDA margins, owing to favourable bases, but staples will witness EBITDA margin pressures," the report added.

Most FMCG firms are witnessing higher demand from urban areas with improved mobility. Also, discretionary spend is also coming back owing to higher outdoor activities and revival in the job market. However, rural demand remains subdued, which was the primary driver of growth for most FMCG firms in recent years.

"Poor rural growth and high commodity inflation now pose risk to all leading FMCG players, including Nestle," said Abneesh Roy, executive vice-president for research at Edelweiss Securities.

With near-term outlook remaining inflationary, price hike in key FMCG goods can't be ruled out in the current quarter, experts said.