FMCG - TO BUY OR NOT TO BUY

FMCG stocks were the flavor on the Street today morning but profit booking has pushed most into the red currently. Marico went on to hit a new high today at Rs.590 and remains in the green. On the other hand, the others, HUL, Godrej Consumer are trading in the red while Nestle is just about holding on to the green. Britannia, Tata Coffee, Tata Consumer are in the green too.

So, why are the FMCG stocks in the news today? Two desi companies – Marico and Godrej Consumer published their Q2 performance report, giving us an inkling into what to expect w.r.t the Q2 earnings.

Both, Marico as well as Godrej were optimistic and did say that Q2 was good but both have voiced concern over rising inputs costs which could subdue the margins.

Take a quick look at Marico’s update:

1: Revenue growth in the quarter was in the low twenties, with volume growth close to double-digits on a 2-year CAGR basis.

2: International business delivered double digit constant currency growth as company witnessed positive trends in all markets, except Vietnam. Vietnam, where a large part of its portfolio is of a discretionary nature, was in the grip of a severe COVID surge and stringent lockdown restrictions.

3. Gross margin is expected to improve marginally from the previous quarter, but will be under pressure on a year-on-year basis due to much higher input costs over the last year.

4. Operating margin is also expected to contract on a year on year basis given the arithmetic effect of significant pricing growth in the topline. As a result, the company expects modest bottom line growth in the quarter.

And now take a look at what Godrej Consumer had to say about its Q2 performance

1. Expect to close Q2 with a double-digit sales growth, driven largely by volume growth and calibrated price increases. Expect 2-year CAGR to be in the double digits.

2. Witnessed broad-based sales growth in its Home Care and Personal Care categories.

3. Marginal decline in CC revenue in Indonesia while Africa, USA and Middle East expected to do well. Muted sales in Latin America and SAARC.

4. Expect operating margins to contract during the quarter driven by a lag between the rise in input costs and increase in end consumer pricing.

HUL is yet to declare its performance expectation but it might be on the same lines.

What we gather here is that topline will be robust as demand is good but rising input costs could dent the profit margins. Thus we could see some pressure in the Q2 earnings, especially on EBITDA level and inflationary pressure might not ease any time soon, what with price of crude now hitting the roof. These companies have not passed on too much of the cost increase to its consumers but going ahead, with demand now back, they will resort to price hikes soon to keep the margins intact.

FMCG stocks are never in recession; they are all-season. So, if the stock prices are down now, buy into them as they are good hedges against stocks which move in tandem with the wind.