FMCG shares under pressure; HUL, Godrej Consumer, Nestle slide up to 4%

Shares of fast moving consumer goods (FMCG) companies were under pressure with most of the frontline stocks down up to 4 per cent on growth concerns. Hindustan Unilever (HUL), Godrej Consumer Products, Marico, Nestle India, Britannia Industries and Dabur India slipped between 2 per cent and 4 per cent on the BSE in Tuesday’s intra-day trade.

At 12:13 pm; the S&P BSE FMCG index was down 1.8 per cent at 13,064 points, as compared to 0.48 per cent decline in the S&P BSE Sensex. So far this year, the FMCG index has shed 5 per cent, as against 2 per cent fall recorded by the benchmark index.

The incessant increase in raw material prices continued to create havoc in the December quarter (Q3Fy22), with gross margins of most FMCG companies feeling the pinch. Marico saw 317 bps contractions in gross margins despite copra prices cooling-off from highs. HUL and Nestlé, meanwhile, witnessed around 200 bps gross margin contraction due to aggressive price hikes and product mix enhancement.

ICICI Securities believes commodity inflation has not only impacted margins but has dented volume growth as rural consumers switched to inferior brands/lower stock keeping units (SKUs).

“There was no sign of dip in major imported commodity prices (crude based commodities, palm oil etc) and it would continue to impact growth and margins in the medium-term (two to three quarters). Thus, we remain cautious on growth outlook. It is important to note that FMCG companies’ valuation multiples have started to contract with peaking of operating margins amid slowing sales growth,” the brokerage firm said in a Q3 earnings wrap.

Despite the correction, analysts at HDFC Securities anticipate more valuation risks in the next few years. Analysts believe that the category leaders will be unable to sustain high market shares due to heavy competition from niche offline/D2C (direct to consumer) players.

“The margin expansion for most companies will be muted, as many have already hit the wall. A large part of cost control has already been captured. Companies must prioritise growth above margins,” the brokerage firm said in a sector report.

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