FMCG makers expect inflation to hit volume growth, operating profit in Q3

New Delhi: Hit by inflation, higher input costs and pricing measures, fast-moving consumer goods companies are expected to see a contraction in their gross margin and a modest-to-flat operating profit in the October-December quarter.

Several FMCG makers are likely to log a low single-digit rise in their revenue, returning to the cycle of value-driven growth.

One of the reasons could be that a number of companies have opted for a price hike in the December quarter due to rising costs of input items such as copra, vegetable oil, and palm oil.

The price hikes came at a time when the urban market was dragged down by lowered consumption due to high food inflation. However, the rural market, which is slightly above one-third of the total FMCG market, stayed ahead of it.

Some of the listed FMCG companies, such as Dabur and Marico, shared their updates for the third quarter of FY25, and analysts expect either flat or low single-digit volume growth.

Home-grown firm Dabur expects a "low single-digit growth" in the December quarter along with a "flattish operating profit" as it faced inflationary headwinds in some of the segments.

"In Q3, inflationary pressures were witnessed in some segments which were partially mitigated through tactical price increases and cost-efficiency initiatives. We anticipate flattish operating profit growth in Q3," said Dabur in an update for Q3/FY25.

Besides, in the December quarter, rural consumption for FMCG was resilient and continued to grow faster than urban, said the company which owns brands such as Dabur Chyawanprash, Dabur Honey, Dabur PudinHara, Dabur Lal Tail, Dabur Amla, Dabur Red Paste, Real and Vatika.

It further said that alternative channels like modern trade, e-commerce, and quick commerce continued to post strong growth, while general trade, which mainly consists of neighbourhood kirana stores, was under pressure in the October-December period.

Marico expressed similar views, saying, "During the quarter, the sector witnessed steady demand trends on the back of improving rural consumption and stable sentiment in urban vis-à-vis the preceding quarter." Over domestic volume growth, Marico said it expects an 'uptick' in the December quarter but on a sequential basis and said its operating profit growth will be 'modest' due to higher input costs.

It expects a "higher-than-anticipated gross margin contraction" as key inputs faced 'higher-than-expected' inflation, said a quarterly update by Marico, which owns brands such as Saffola, Parachute, Hair & Care, Nihar and Livon, among others.

"Among key inputs, copra prices remained firm at higher-than-expected levels and vegetable oil prices moved up during the quarter, while crude oil derivatives remained range-bound. The rising trend in input costs is expected to result in a higher-than-anticipated gross margin contraction on a year-on-year basis, as the company continues to favour consumer franchise expansion in the current environment," said Marico.

According to Nuvama, the urban demand scenario is challenging due to inflationary pressures, low wage growth and higher housing rental costs.

"Urban slow down shall continue for two-three more quarters," it said, adding, "Rural demand continues to report a gradual recovery and outpace urban demand aided by freebies and good rains." Also, due to price hikes in categories such as soaps, snacks an tea, consumers are going for smaller packs, which "negatively impacts volume", it added.

Margins in categories such as soaps, snacks and tea are "under high pressure" due to almost 30 per cent YoY inflation in palm oil and tea, it added.

Additionally, the late arrival of winter in the December quarter has also impacted the topline as the sale of season-specific products a body lotion, Chavayanprash etc. could not be picked up.

Anand Ramanathan, partner, consumer products and retail sector leader, Deloitte India, said the challenge from D2C brands and the growth in quick commerce will continue to put pressure on margins.

However, he also added: "Harvest season from January to April will ease some of the pressure on margins in agricultural commodities which will help ease the pressure on commodity prices."