But profit margins are expected to shrink by as much as 100 basis points owing to spiralling commodity costs, said brokerages and rating companies ICICI Direct, Edelweiss Securities, HDFC Institutional Equities, Emkay Financial Services and Crisil. HUL, Marico, Dabur, ITC, Nestle and Tata Consumer will announce quarterly earnings in the next two weeks.
ICICI Direct forecast a double-digit increase in sales for HUL’s home care, beauty and personal care and foods segments, thanks to the revival in the home care and personal care segments.
“However, HUL’s operating margins are likely to see a 124 bps contraction in the second quarter,” the brokerage firm wrote in a report. “We estimate 100 bps gross margins contraction with a steep increase in commodity costs.” HUL will declare its second-quarter earnings Tuesday.
Analysts said while most FMCG firms made calibrated price increases and went in for another round of cost savings in Q2, gross margins are still likely to contract. While palm oil rose 60% year-on-year, crude increased from $75 per barrel to $85, putting operating margins under pressure. Both are core ingredients for packaged goods such as soaps, chocolates and cosmetics. Prices of other key commodities for dairy, biscuits and confectionery products such as milk, skimmed milk powder, cocoa and wheat too have been on the boil, following volatility in global prices.
“Domestic volume growth may accelerate as chocolate consumption comes back and challenges related to manufacturing ease. But higher raw material costs would weigh heavy on gross margins,” analysts at Phillip Capital said in an earnings preview on Nestle, which makes KiKat chocolate and Maggi noodles. A gradual uptick in the out-of-home and discretionary portfolios also contributed to growth, with more offices reopening and air and train travel increasing month-on-month.
Strong demand and double-digit growth in the top line are expected to reflect in the quarter, which coincides with monsoons, with India’s rural markets having recovered from the second wave of Covid-19, aided by higher farm incomes and reverse migration of the workforce. While companies raised prices 5-15% to offset commodity price inflation in the quarter, which may contribute to growth partially, analysts said margin pressures would persist.
“Continued revival in demand for consumer discretionary products will likely lift corporate revenues 18-20% year-on-year in the second quarter. However rising input prices may have capped margin expansion sequentially,” Crisil said in a report.
Marico India said in a pre-earnings exchange filing that operating margins are expected to contract on a year-on-year basis.
“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,” Marico said. “During Q2, the FMCG sector witnessed improving demand trends as mobility levels increased with reducing Covid infections and accelerated vaccination drives. Discretionary categories and out-of-home consumption also visibly picked up.”
