Price cuts might not bring in volume growth for FMCG majors in Q2 say analysts

• Price cuts taken in mass segments will erase pricing-led growth seen in FMCG companies.
• Few analysts are confident that price cuts will add to volume growth in Q2.
• Without a meaningful rural recovery, volume growth will remain slow.

It might be a slow second quarter for FMCG companies with hazy volume recovery and tapering raw material effects. The rise of new and local players have been eating into the business of top FMCG players. And, they chose to take price cuts in mass categories during the quarter.

Analysts are divided on how much price cuts will add to volume growth. A report by Centrum said that price cuts pushing are primary volumes but off-take lags. The demand for packaged foods is rising but hair oils, toothpaste categories saw falling volumes.

“Selling prices have been rationalised given the drop in commodity costs but there has not been a commensurate increase in volumes yet,” said J M Financial. The pricing-led growth in FMCG companies is now a thing of the past. Without significant volume recovery, revenues are ecpected to remain subdued this quarter.

“We expect low single digit volume growth and low-to-mid single-digit value growth for most FMCG companies, with the tapering of pricing growth due to price cuts and/or anniversarization of price hikes. The underlying rural demand remains subdued. Uptick, if any, would be optical off a low base,” said a report by Kotak Institutional Equities.

Analysts believe that without a meaningful recovery in rural demand which is yet to pick up, volume recovery will remain slow. Even tapering inflation during the quarter has not improved the rural consumer sentiment due to unseasonal rains.

Moreso, the festive consumption of discretionary items also comes with a lag this year due to the ‘Adhik Mas’ effect.

Raw material benefits slip

On the other hand, the margin growth seen last quarter due to lower raw materials will also taper off. The raw material index has moved up by 8-9% over the last three months. Between July and September, crude oil prices rallied by 20%, and commodities will not be as benign as they were in Q1.

On a year-on-year basis however their costs will be lower, adding to margins due a favourable basis. “A favourable base would still drive strong year on year gross profit margin expansion and earnings for September quarter, but some of the margin gains would be in the base soon especially given the recent uptick in raw material prices,” said J M Financial.

The stress of rising competition will also eat into margins in more ways than price cuts. Players will continue to ‘normalise’ brand-building investments that were run down during the hyper-inflationary phase in FY23.

“Most companies have indicated that a large part of gross margin savings will be invested behind brands. Hence, operating margin expansion will be lower compared to gross margin expansion,” said Sharekhan.

Investors will watch out for management commentary on how volume uptick in the second half of the year. And a picture on when rural India will see a full-fledged recovery.