Gains in India’s FMCG sector could be weighted by ad spend increases, price cuts: BNP Paribas


  • Volume contraction for the FMCG sector was more pronounced in rural areas, says one BNP Paribas report.
  • While the research firm expects margin improvement in FY24, earnings estimates are below consensus due to INR depreciation, increase in ad spending and selective price cuts.
  • According to the report, consensus earnings estimates for FY24/25 are overly optimistic.
  • Valuation multiples of Indian FMCG companies have expanded since June 2022, says BNP Paribas.

Major consumer goods have been hit hard by inflation in recent quarters, with volume growth taking a back seat. It is clear that the growth was driven by multiple price increases taken by the players – not volume growth. The future looks brighter now that commodity prices are cooling and price cuts could even boost consumption.

Despite affluent India’s consumption holding up well, mass market volumes and Covid-benefiting categories, such as healthcare and hygiene segments, were impacted by inflation.

“Sales growth was driven by price increases, with volumes remaining subdued across all categories. The volume contraction was stronger in rural areas. Companies expect rural demand to recover in the second half of FY23 thanks to government intervention, a good monsoon and higher crop yields,” says BNP Paribas.

Ad spend and price cuts

Going forward, BNP shares corporate optimism that the second half of the current fiscal year also bodes well for revenues and margins as commodity prices moderate.

“While we expect margin improvement in FY24, our earnings estimates are below consensus as we anticipate INR depreciation, an increase in ad spending and selective price cuts to boost volumes under pressure,” the research firm said.

Lower advertising spending alongside a reduction in corporate tax rates has contributed to the industry’s earnings growth over the past five fiscal years, despite subdued revenue and gross profit growth.

But now ad spending may resume to bring back consumers who have downtraded to lower-priced unbranded products over the past six months, leaving little room for a strong margin recovery.

Lower estimates, more expensive stocks

BNP Paribas increased its sales estimates for most companies during the earnings season, but cut the overall industry EBITDA margin by 30 basis points to 20.9-22.1% for FY23 and FY24 – driving both EBITDA and earnings per share by 1-2% for both years.

“Although the outlook for FY24 is positive, driven by moderation in raw material costs and signs of a nationwide recovery, we think FY24/25 consensus earnings estimates are overly optimistic. With no triggers for a sharp multiple downgrade, we think some stocks could undergo a time correction over the next year. Our favorite sector picks remain ITC, Britannia, Emami and Jubilant Foodworks,” the report said.

Most FMCG stocks have had a bull run over the past five months, making them expensive relative to the tough conditions awaiting volume growth. “Since June 2022, valuation multiples of Indian FMCG companies have increased as concerns about continued inflation have eased. This has caused several stocks to rise above their five-year average over the next 12 months price-to-earnings ratios,” the report said.

The downside risks the research firm sees include an increase in competitive intensity, leading companies to reduce prices and growing sales at a slower than expected rate; and lower than expected margin recovery.

Rural recovery is affected by the dampened Kharif season

Many economists and rating agencies also question the pace of the country’s economic growth, which is marred by constant downward revisions. Aside from global spillovers, experts believe a lot depends on the recovery in rural areas – which will play a big role in FMCG majors’ volume and sales growth.

While green shoots of recovery have been seen in spurts such as car sales, rural consumption remained subdued even after lockdowns ended. A key driver of rural recovery is a good Kharif crop, which has suffered from erratic monsoons this year.

“Prematurely heavy rainfall in the states of North West and Central India between late September 2022 and mid October 2022 is likely to have contributed to the standing crop moisture content, posing downside risks to kharif output relative to the first Advance Estimates,” according to an ICRA report.


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