Companies operating in defensive sectors, such as the Fast-Moving Consumer Goods (FMCG) sector, are considered immune to recessionary trends in an economy. Let’s look at the Q2 FY23 earnings expectations amid the looming fears of a recession!
On Input Cost Inflation
Margins for various FMCG firms had been under pressure for a few quarters in a row due to increasing input cost inflation. Things are getting better on this front.
Many FMCG firms are seeing a fall in commodity prices. Prices of crude-linked derivatives and palm oil reduced substantially in Q2 FY23. Crude oil prices, hovering over $113/barrel in Q1, stood at an average price of around $100/barrel in Q2 FY23.
What do Companies Have to Say?
According to a Q2 FY23 quarterly update filed by Marico Limited, copra prices (an essential input cost for the company) were lower than expected during the quarter, whereas edible oil and crude oil prices also corrected sequentially. Edible oil prices are likely to trend lower over the next few months.
According to Edelweiss Securities, palm oil is a crucial input in soaps, biscuits, and noodles. Companies such as HUL, Godrej Consumer Products Limited, Britannia, and Nestle will be the key beneficiaries of this trend.
What’s the Future Outlook?
Motilal Oswal expects a recovery in margins of FMCG companies only by Q3 FY23. This is because companies are sitting on inventories purchased at a higher cost. So margins will start improving from H2 FY23 due to the falling input prices. Also, companies will be able to pass on the price benefit to customers to generate demand.
However, rain deficit in states such as UP, Bihar, and West Bengal could derail the margin recovery path as rural demand has remained subdued till now. One-third of FMCG revenues accrue from rural areas!