Rough terrain for FMCG cos amid sluggish rural demand

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Marico whose stocks are up only by 1% and 4%, respectively. Dabur shares have lost nearly 6% in 2023 so far. In comparison, the Nifty FMCG index has risen over 25% so far.

However, it is worth noting that the climb in the index was primarily driven by ITC Ltd, shares of which have risen by 38%. A lower-than-expected increase in tax on cigarettes during the Union budget 2023, coupled with improvement in its businesses have aided investor sentiment. However, growth is moderating now in its cigarette business, partly owing to a higher base.

Coming to profitability, most FMCG companies are expected to clock a year-on-year rise in gross margin in FY24 after two consecutive years of decline. This is largely due to benign raw material costs, with prices for commodities like crude oil falling. Even so, caution is warranted as prices of some agricultural commodities have been on the rise with wheat, and sugar prices increasing 6-7% sequentially in Q3 so far.

These impact the raw material baskets of food companies such as Dabur, Nestle India Ltd and Britannia Industries Ltd. According to Motilal Oswal Financial Services, the overall commodity cost basket in Q3 so far is down by 2.4% year-on-year, but is higher sequentially albeit slightly by 0.5%. The increase in the agricultural basket was offset by a drop in the prices of non-agricultural commodities.

In any case, the valuations of most FMCG companies do not offer comfort. Shares of HUL, Dabur, and Britannia trade at higher multiples of 41-51 times their FY25 estimated earnings, according to Bloomberg data. Given the lack of near-term growth levers, these multiples look expensive.