HUL To Dabur Hopeful Of Margin Recovery In Second Half Of FY23

Staples-to-soap makers are set to see a gradual revival in their margins as commodity prices start cooling off after shooting through the roof in the past few months following the Ukraine war-led global supply chain chaos.The margin outlook is still weak for the ongoing quarter, according to fast-moving consumer goods companies, but the recent input price correction should drive margin recovery in the second half of the fiscal. The relief in margin should coincide with a pick-up in demand, albeit on a low base, as price stability elevates consumer sentiments ahead of the festive season.India's largest consumer goods maker, Hindustan Unilever Ltd., expects to see a sequential improvement in margin from the December quarter onwards if the softening trends in commodities continue. But the pace of recovery would depend how fast the trend moves beyond palm oil to other raw materials like soda ash, caustic soda, milk extracts, coffee, and barley."Consumption of higher cost pipeline inventory, however, will result in our September quarter margins remaining under pressure," said Sanjiv Mehta, HUL's chief executive officer and managing director.Aside from inflationary pressures, the recovery of margins will be determined by other expenses such as employee costs, promotions and advertising spend as well as product mix. For instance, HUL's margin on ice cream was hit in the first quarter despite high sales because the category is low margin accretive. Overall volumes remained flat on a three-year annualised basis, but Mehta expects demand to come back as inflation tapers off, aiding margins.The industry also tackled the pressure on margins via cuts in ad spend and lower employee costs versus pre-Covid levels. But most businesses will continue to prioritise brand-building initiatives, particularly for the new product launches, over margins in the face of increased competition.According to Centrum Broking, "Rising competitive intensity from Dabur (Dant Rakshak) and HUL (Pepsodent Sensitive) could warrant high ad-spends, weighing on second quarter margins of Colgate Palmolive (India) Ltd." The toothpaste maker saw a 339-basis-point dip in operating margin to 26.6% in the first quarter also, due to an increase in other expenses by 7.9% and ad-spends by 1.8%, even as employee costs fell 1.3% year-on-year..Dabur India Ltd., too, expects a recovery in margins during the third and fourth quarters of the current fiscal, according to its Chief Executive Officer, Mohit Malhotra."In Q2, we will see margin compression," he said in a post-earnings call with analysts, "but from the third quarter onwards, when we lap over inflation of around 11% to 12% in the last year, we should see the real impact of softening commodities and the impact of price increases kicking in."Most FMCG companies took price hikes in the form of direct increases in retail prices and grammage cuts or reductions in pack sizes. Yet, price hikes could not cover the sky-high inflation, led by crude and palm oil, seen in the April-June quarter. "This, coupled with the rural slowdown and inflation denting consumer wallets, led to a muted 5% growth in operating profits for the FMCG coverage (excluding ITC Ltd. and Varun Beverages Ltd.)," according to a note by Jefferies. "Six out of 11 companies missed consensus estimates, which is the highest in two years, largely due to weak margins."Godrej Consumer Products Ltd. saw margin erosion in the first quarter, followed by Britannia Industries Ltd., Nestle India Ltd., Colgate-Palmolive (India) Ltd. and Emami Ltd. However, Marico Ltd. and Tata Consumer Products Ltd. remained outliers, given the benign copra and tea prices.But the worst seems to be over. Both margins and demand are likely to start recovering from the second half of the ongoing fiscal, said Rajat Tuli, partner (consumer and retail practice), A T Kearney. "Easing inflation would allow for increased discretionary spending on marketing especially with the onset of the festive season, thereby further boosting demand," he said.Abneesh Roy, executive director, Edelweiss Securities, concurred."As the rainfall situation improves, rural demand is expected to catch up with urban demand, and fiscal 2023-24 is expected to mark a mix of strong margins and reasonable volume growth," he said.Angshu Mallick, managing director and chief executive officer, Adani Wilmar, pointed out that "margins are a function of volume growth, and as volume rises, the company will stand to benefit from operating leverage".Edible oil margins weakened to 1.8% during the first quarter of FY23 from 2.4% in the previous quarter and 3.4% in the same quarter last year as consumers switched from expensive brands to cheaper alternatives due to inflation, Mallick said during a post-earnings call.Consumers, however, are gradually reverting back to larger packs after the company reduced its prices by up to Rs 30 per litre in July to pass on the benefits of a fall in global commodity prices. "With the reduction in prices, we expect an uptick in demand in the second half of the year on the back of festivities and weddings," Mallick said. "Good rainfall in many states, barring UP, Bihar, and Bengal, also bodes well for rural demand," he said..Demand Back Amid Festive RushConsumer inflation hit an all-time high in April in the wake of the Russia-Ukraine war, dampening demand. But the trend is reversing with high value packs that saw a dip in sales in the past year again picking up, said Vikas Kumar Agarwal, founder, Go Grocer, which is only into grocery delivery."We saw a fall in the number of high-value packs consistently during the past one year," he said. "But with the onset of the festive season, a time when consumers typically overlook the price and tend to indulge a little extra, we are noticing a rise in the sales of high-value packs once again."Sales of fast-moving consumer goods in August rose 6.3% sequentially and 22.5% over the previous year led by categories like commodities and personal care, according to data from Bizom. "We're seeing favorable tailwinds in the festival consumption," said Akshay D’Souza, chief of growth and insights at the retail intelligence platform that tracks 75 lakh kiranas across India. "We see the challenges of passing increased costs are now over and companies are now putting efforts to shore up consumption.".However, it is yet to see if this demand recovery is sustainable as companies may still resort to price hikes to protect dwindling margins."We are not priced at the peak of the commodity... so there's still a price versus cost gap,” said HUL’s Mehta. “And to some extent when there is a reversal of commodity trend, we are also circumspect on our pricing decisions," he said, indicating no immediate respite in terms of price cuts.Instead, the companies are rolling out bridge packs or packs that are priced between the existing highest and the lowest prices to keep demand flowing.HUL, for instance, introduced a Rs 16 per pack for its soap brand Lifebuoy—a bridge between the Rs 10 and Rs 36 per pack that are already available in the market. Biscuit maker Parle Products introduced its flagship glucose Parle-G brand as well as crackers at Rs 15, while snacking brand Cornitos is introducing a Rs 50 price point for modern trade stores."We continue to face 20% to 25% inflation on raw materials," said Vikram Agarwal, managing director, Greendot Health Foods Pvt.—the owner of nacho crisps brand 'Cornitos'."Since we can't take a price boom on the Rs 35 a pack or keep on downsizing the premium packs, Rs 50 is the middle path for us between Rs 35 and Rs 90 a packs," Agarwal said.

HUL To Dabur Hopeful Of Margin Recovery In Second Half Of FY23

Recent input price correction should drive margin recovery in the second half of the fiscal, according to FMCG companies.

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