Q3 results: Decline in volume, revenue growth drags FMCG companies

The slowdown in private consumption in the economy is taking a toll on the growth of fast-moving consumer goods (FMCG). The net sales growth of listed FMCG companies hit a 14-quarter low of 2.5 per cent in October-December 2023 (Q3FY24).

This is the lowest revenue growth for the industry since the June 2020 quarter, when the FMCG firms in the Business Standard sample had reported a 13.2 per cent Y-o-Y decline in combined net sales owing to the lockdown.    

The companies’ combined net sales inched up to Rs 57,604 crore in Q3FY24, up from the Rs 56,203 crore in Q3FY23 and Rs 56,921 crore in Q2FY24.   

The companies reported a slowdown in revenue growth in Q3FY24 despite a low base during the same quarter a year ago.

Their combined net sales were up just 7.4 per cent year-on-year (Y-o-Y) in Q3FY23, which was the lowest in nine quarters then.

The analysis is based on a common sample of 20 FMCG companies that have declared their Q3FY24 results so far. The sample includes key industry players such as Hindustan Unilever, ITC, Asian Paints, Dabur India, Godrej Consumer, Marico, Colgate-Palmolive, P&G Hygiene, Gillette India, and Jyothy Labs. Some prominent companies missing in the sample include Nestle India, Britannia Industries, Tata Consumer, Berger Paints and Kansai Nerolac.

Analysts attribute the slowdown to poor volume growth especially in rural areas.

“The company (Hindustan Unilever) reported 2 per cent volume growth and nearly flat revenue growth. Volume recovery is being delayed, especially in rural areas, despite price cuts and consumer promotions. The trend of urban growth outpacing rural areas, and the premium segment outperforming the mass market, has continued,” wrote analysts at Motilal Oswal Securities on Hindustan Unilever Q3FY24 results analysis.

Amnish Agrawal of Prabhudas Lilladher in his recent India strategy report wrote: “Q324 results show (the) impact of a tepid festival, marriage and rural demand while urban demand has been resilient. (The) demand scenario is mixed with strong demand from upper and upper middle class while lower class seems to be under inflationary pressure.”

Earnings growth for the industry was relatively good, thanks to gains from margin expansion from lower raw material costs. The combined net profits of FMCG companies in the sample were up 9.3 per cent Y-o-Y to Rs 11,820 crore in Q3FY24, up from the Rs 10,812 crore a year ago. Growth in earnings was, however, down from 13.8 per cent Y-o-Y in Q3FY23 and 9.7 per cent Y-o-Y in Q2FY24 (see the adjoining charts).

The industry operating margin, or the PBIDT (profit before interest, depreciation and taxes) margin, improved to 28.6 per cent of revenues in Q3FY24 from 27.8 per cent a year ago and 28.3 per cent in Q2FY24.
 

The operating margin in Q3FY24 was nearly 100 basis points higher than the five-year average margin of 27.6 per cent of total revenues.

One basis point is one-hundredth of a per cent.

Companies gained from a moderation in raw material costs. The raw material intensity declined to 46.7 per cent of net sales in Q3FY24 from 49.3 per cent of net sales in Q3FY23 and 46.8 per cent in Q2FY24. The raw material intensity in the third quarter was nearly 90 basis points lower than the five-year average ratio of 46.8 per cent of net sales.

As a result, the gap in FMCG performance gap with the rest of corporate India widened in the third quarter. For comparison, the combined net sales of all 954 listed companies (gross interest income in the case of banks and other lenders) that have declared their third-quarter results so far are up 8.9 per cent Y-o-Y to Rs 26.22 trillion in Q3FY24, down from the 19.1 per cent Y-o-Y growth in Q3FY23 but an improvement over the 6.4 per cent Y-o-Y growth in Q2FY24.

The combined net profits of the 954 companies were up 22.8 per cent Y-o-Y to Rs 2.47 trillion in Q3FY24, thanks to faster growth in earnings reported by public-sector oil-marketing companies and auto makers.