From HUL To Dabur, Rural Recovery Remains Gradual, Says Morgan Stanley

In terms of regions, rural recovery was affected by food inflation and uneven rainfall distribution, Morgan Stanley said.

<div class="paragraphs"><p>FMCG products kept on shelves inside DMart. (Photo: BQ Prime)</p></div>
FMCG products kept on shelves inside DMart. (Photo: BQ Prime)

Fast-moving consumer demand trends in the second quarter were similar to those in the first quarter given the weak recovery in rural areas, according to Morgan Stanley. The market volumes grew in the high single-digits on a base of mid-single-digit volumes.

The urban markets continued to do better, and rural volume growth improved sequentially to 6.7% year-on-year (4% in Q1), on a softer base, the research firm said in a Nov. 8 note.

"In terms of regions, rural recovery was affected by food inflation and uneven rainfall distribution," it said.

Some categories have seen a resurgence of smaller players, which are growing faster than large players (6 times growth in detergent bars, 1.4 times in tea), the brokerage said. "To counter these players, companies took price cuts to defend or gain market shares."

Easing Inflation Aid Margins

Gross margins improved year-on-year and quarter-on-quarter after companies selectively took price cuts in soaps, laundry and biscuits.

Ebitda margin improved YoY and QoQ (barring Marico Industries Ltd. and Tata Consumer Products Ltd.) across all companies. The extent of Ebitda margin expansion was lower than the gross margin expansion, as companies stepped up ad spends, Morgan Stanley said.

FMCG Consumption Showing Improvement, Says Dabur India

Recovery To Be Gradual

Growth is expected to be volume-led for most companies, and volume growth is expected by management to improve in the second half, aided by rural recovery, it said.

The volume value growth should be similar, as cuts are taken and the price hikes are factored into the base. Commodities have shown mixed trends.

FMCG Q2 Results Preview: Volume Uptick Remains Elusive, Margin To Expand Further

Companies Outlook

Hindustan Unilever Ltd.

  • The overall year-on-year inflation of the company is moderating, the brokerage noted.

  • Rural demand trends broadly similar to first quarter.

Dabur India Ltd.

  • Inflation continues to ease and management maintained its Ebitda margin guidance for FY24 at 19.5%, despite an increase in advertising spends, the note said.


  • Downgraded the stock to 'equal-weight'.

  • The management expects gross margin to expand by 350-400 basis points, higher than its earlier expectations of 300-350 basis points.

  • It looks for Ebitda margins to expand by 200 basis points in FY24 (18.5% in F23), as brand-building investments continue (9.5%+ in FY24; 8.6% in FY23).

  • "During second quarter, copra prices were up 1% QoQ (-2% YoY), rice brand oil was up 6% QoQ (-23% YoY), liquid paraffin (LLP) was down 5% YoY, and HDPE was down 10% YoY," it said.

  • Copra prices are expected to exhibit upward bias in the near term, as copra enters into an off-season ahead of the festive season, Morgan Stanley said.

Britannia Industries Ltd.

  • Morgan Stanley has an 'overweight' rating on the stock.

  • There are signs of inflation for flour and sugar; all other commodities are in a deflationary environment (especially palm oil), the brokerage said. "Management will be tracking the stock price situation closely and remains vigilant of pricing actions," it said.

Nestle India Ltd.

  • Has an 'underweight' rating on the stock.

  • The key headwinds are due to weak monsoons for maize, sugar, oilseeds and spices.

  • Coffee prices remain volatile due to the global supply deficit and further poor weather during the harvest of the Indian Robusta crop may impact production.

  • "Upcoming winter weather may impact wheat production. Milk prices are expected to be stable, aided by healthy milk flush expected in winter."