![](\"https:\/\/im.rediff.com\/money\/2023\/jan\/04fmcg.jpg?w=670&h=900\")
<\/p>\nLeading consumer goods companies, including Hindustan Unilever, ITC, Nestlé, Britannia Industries, and Dabur, have exhibited remarkable performance on the stock market in recent months.<\/p>\n
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Over the past year, the National Stock Exchange Nifty FMCG Index, which tracks the market capitalisation of the top 15 companies in the fast-moving consumer goods (FMCG) sector, has surged by 17.3 per cent.<\/p>\n
In contrast, the Nifty50, a broader market index, has witnessed an 8.8 per cent increase during the same period.<\/p>\n
The FMCG stocks have also been rally leaders in the current calendar year.<\/p>\n
The Nifty FMCG Index is up 16.3 per cent since the start of 2023, compared to a 6.6 per cent rally in the benchmark Nifty50 during the period.<\/p>\n
The rally in FMCG stocks, however, seems to be skating on thin ice and could run out of steam, given a sharp slowdown in the industry’s revenue growth.<\/p>\n
Historically, there is a high positive correlation between net sales and profit growth.<\/p>\n
A slowdown in net sales in the first quarter (Q1) of 2023-24 (FY24) will soon translate into an earnings slowdown, putting pressure on FMCG company’s share price.<\/p>\n
The combined net sales of 15 consumer goods companies that are part of the Nifty FMCG Index were up just 4.1 per cent year-on-year (Y-o-Y) in the April-June quarter (Q1FY24), growing at the slowest pace in 12 quarters.<\/p>\n
By comparison, the combined net sales were up 10 per cent Y-o-Y in the January-March quarter (fourth quarter, or Q4, of 2022-23, or FY23) and up 27.1 per cent Y-o-Y in Q1FY23.<\/p>\n
Most companies in the sector, however, posted double-digit growth in net profit in Q1FY24, attributable to a sharp decline in their raw material cost.<\/p>\n
The combined net profit of FMCG companies was up 18.6 per cent Y-o-Y in Q1FY24, growing at the fastest pace in four quarters.<\/p>\n
The combined raw material expenses for the 15 FMCG companies in Business Standard<\/em>’s sample were down 4 per cent Y-o-Y in Q1FY24, compared with 3.5 per cent Y-o-Y growth in Q4FY23 and 33 per cent Y-o-Y growth in Q1FY23.<\/p>\n The gap or the spread between Y-o-Y growth in raw material expenses and net sales at 8.1 per cent in Q1FY24 is the largest in at least three years and hints at a rationalisation in production by quite a few consumer goods companies in line with a slowdown in demand, besides a price deflation in commodities.<\/p>\n The companies had last reported a Y-o-Y decline in raw material expenses in Q4 of 2019-20 (FY20) and Q1 of 2020-21 in the wake of a lockdown in the country.<\/p>\n But it was accompanied by a similar Y-o-Y decline in companies’ net sales.<\/p>\n “FMCG companies delivered largely muted volume growth in Q1FY24 due to still lacklustre rural demand, although there were early signs of improvement.<\/p>\n “Commodity tailwinds supported margin expansion supporting double-digit earnings growth,” write analysts at HSBC Equity Research on their earnings review for Indian companies for Q1FY24.<\/p>\n As a result, the raw material expenses-to-net sales ratio for FMCG companies declined to a 10-quarter low of 47.2 per cent in Q1FY24, the lowest since the October-December quarter of FY20.<\/p>\n This resulted in the industry’s operating profit or earnings before interest, tax, depreciation, and amortisation margin rising to a 16-quarter high of 27.2 per cent of the total revenues in Q1FY24, up from 24.6 per cent a year ago.<\/p>\n Some equity investors, however, doubt the sustainability of the margin-led earnings growth in the industry.<\/p>\n The FMCG index has now begun to underperform the broader market after a long gap.<\/p>\n The Nifty FMCG Index is down 2.4 per cent in the month of August so far, against a 2.2 decline in the Nifty50.<\/p>\n