The FMCG sector has seen strong growth momentum in the second half of the calendar year 2020 led by strong consumption, shift towards the organised sector, new product launches and increasing e-commerce channel sales.
The growth momentum is expected to continue in the quarter ended March 2021 as well, while the low base due to lockdown in March 2020 is likely to further propel the growth numbers.
ICICI Direct expects FMCG companies to witness 20.2 percent revenue growth in Q4FY21 on account of a sales decline of 7-15 percent in the base quarter.
“We believe packaged foods, health supplements, edible oil, the immunity-boosting product have continued the stronger growth in Q4. Moreover, some discretionary categories like cosmetics, skin care, juices would have also witnessed stronger growth due to pent-up consumption," ICICI Direct said.
The FMCG companies are likely to see a 50 bps margin contraction due to a sharp rise in raw material prices. Net profit growth for these companies is expected to be at 16.8 percent (lower than sales growth) for partially impacted by flat profitability for ITC.
Among companies, the brokerage firm expects Dabur, HUL, Zydus, Tata Consumer and Marico to witness robust 22-35 percent sales growth on the back of low base, strong demand in key categories and pricing growth in some categories like soaps, hair oil & tea.
It expects ITC (FMCG) to grow 15 percent during the quarter. ITC & VST Industries to witness 4-5 percent volume decline in cigarettes segment given the trend of work from home has reduced cigarette consumption, to a certain extent.
Nestlé is expected to witness 10.8 percent revenue growth led by strong growth in noodles segment and an enhanced rural distribution network.
On the cost side, palm oil, copra prices have risen 47 percent, 25 percent, respectively, in the last one year. Also, crude prices have risen above $60 per barrel. Further, tea prices are still up around 50 percent YoY.
This has pushed FMCG companies to take price hikes to the tune of 5-12 percent.
ICICI Direct expects gross margin contraction for HUL, Marico and Tata Consumer. However, favourable prices of sorbitol and calcium carbonate would enhance gross margins for Colgate. Though milk prices have risen sharply in the last three months, we believe inventory stocking of SMP by Zydus would have helped it in expanding gross margins.
“Moreover, FMCG companies always have levers of cutting marketing spends along with cut in some overhead spends, which would help them to protect operating margins, to a certain extent,” the brokerage said.
The brokerage's top picks among FMCG sector are Dabur India, Tata Consumer Products and Zydus Wellness.