FMCG firms to report uptick in Q1 margins

The Asian Age.  | Sangeetha G

Business, Companies

Benign raw material prices, low media intensity to help.

Though the budget has recently increased the customs duty, palm oil prices were 20 per cent down in Q1FY20.

Chennai: Despite the slower volume and revenue growth, FMCG companies may see their margins improving in June as well as September quarter due to benign raw material prices and low media intensity.

Tight liquidity conditions and sluggishness in rural demand has been affecting both volume and revenue growth of FMCG companies. However, gradual margin expansion has been visible in June and is likely to get better in second quarter, finds Kotak Institutional Equities.

"Margin prognosis is relatively sanguine with lower crude and other key raw material prices starting to reflect in consumption cost for part of first quarter. Full benefit of raw material tailwinds on gross margins will probably show up from 2QFY20 onwards. Low media intensity will likely negate operating leverage impact, driving expansion in operating margins for most companies," it said.

Among raw materials that have witnessed deflationary trend, Coffee Robusta prices were down seven per cent YoY in Q1FY20, Arabica by 14 per cent YoY and cocoa bean by eight per cent. Crude oil prices were down by eight per cent YoY, copra by 25 per cent and coconut oil by 23 per cent. Though the budget has recently increased the customs duty, palm oil prices were 20 per cent down in Q1FY20.

In Q1FY20, modest margin expansion of 10.1 per cent is likely for consumer staples companies covered by Kotak against 8.1 per cent in Q4FY19 and this can help 11 per cent growth for profit after tax in first quarter against eight per cent in the fourth quarter of last year.

Marico, GSK Consumer, Hindustan Unilever, Godrej Consumer Products, Colgate and Britannia are some of the companies that stand to gain.

Kotak expects Ebitda margin of HUL to expand 50 bps YoY in Q1FY20 aided by operating cost efficiencies. Marico might see 254 bps YoY expansion in Ebitda margin led by 466 bps YoY expansion in gross margin due to easing of copra prices. Kotak also foresees 40 bps YoY expansion in gross margin for Bajaj Consumer Care, 205 bps consolidated gross margin expansion of for Britannia, 76 bps YoY expansion in EBITDA margin of GSK Consumer and 50 bps YoY improvement in consolidated Ebitda margin of Godrej Consumer Products.