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Mumbai: Stocks of FMCG companies tumbled on Thursday, driven by concerns over sector leader HUL's declining revenue.The Nifty FMCG Index plunged nearly 3%, its steepest single-day drop in 28 months after HUL's second-quarter results missed expectations, disappointing investors. Analysts anticipate continued margin pressure for consumer companies in the near term due to rising raw material costs and weak urban demand.The Nifty FMCG shed 2.8%, while the benchmark Nifty dipped 0.15%. The sectoral index declined nearly 12% last month compared to the 6% fall in the Nifty 50."HUL's commentary highlighted the slowdown in the urban segment, mirroring what we saw with Nestle and Tata Consumer Products," said Preeyam Tolia, senior research analyst at Axis Securities. "While rural demand remains stable, margin pressure is likely to persist due to volatility in palm oil and crude oil prices."Tolia also noted that ITC's diversified business might shield it from the full impact on margins, but investors will watch closely for further guidance on urban demand.114564000HUL stock fell 5.8%, while Colgate Palmolive and Marico dropped 3.4% and 3.2%, respectively. Godrej Consumer Products declined 3%, and Britannia Industries, Dabur, and Nestle were down by about 2%. Tata Consumer Products declined by 1.67% and ITC by 2%.Earlier this week, Nestle India chairman Suresh Narayanan warned that the FMCG sector is grappling with sluggish demand, driven by a combination of factors, including rising food inflation.Many analysts highlighted the challenges posed by inflationary pressures, which are affecting consumer spending and dampening growth in the sector. They had earlier expected urban markets to remain stable even as rural demand gradually recovered. However, the increased strain on urban demand has raised concerns."Given the limited pricing flexibility of FMCG companies, near-term margin pressure seems inevitable," said Vishal Punmiya, lead analyst for consumer staples & discretionary at YesSecurities. He added that rising palm oil and crude prices, alongside inflation in agricultural and food commodities, are weighing heavily on their gross margins."Volumes should gradually recover as rural demand improves on a lower base," Punmiya added, "but inflationary pressures might force staggered price hikes over the next few quarters, starting from Q3."Of the 15 stocks on the FMCG index, 12 declined while three advanced on Thursday. Over the past month, the index shed 11.3%, compared to a 5.9% decline in the benchmark index. "Valuations in the FMCG sector remain a concern, limiting upside potential for stocks. While downgrades aren't expected, earnings cuts can't be ruled out," Tolia said, noting that significant demand recovery is unlikely before Q4, with gradual improvements expected in Q3. Punmiya said that FMCG sector valuations are still trading at a premium, although companies like Dabur, Hindustan Unilever, and Tata Consumer Products are relatively more attractive within the sector.

NEW DELHI/MUMBAI: The urban kirana is headed for a challenging Diwali, with general trade distributors noting a 25-30% month-onmonth drop in sales since July, as India’s largest fast-moving consumer goods (FMCG) companies report steady surge in quick commerce sales simultaneously.Some companies such as Dabur and Nestlé have hinted at correcting inventory at general trade, in line with changing consumer shopping habits in cities, though kiranas remain the biggest channel for FMCG.“We are looking at recalibrating some inventory at general trade,” said Suresh Narayanan, chairman of packaged foods maker Nestlé, whose ecommerce sales hit a seven-year high in July-September. “Ecommerce sales now contribute 8.3% of our total domestic sales, with quick commerce accounting for 50% of that,” he said. During the quarter, the maker of Maggi noodles and Nescafé coffee saw its ecommerce sales grow 38%. “General trade is doing reasonably well… Ecommerce is going extremely well… All channels are important for us,” Narayanan said.India has about 13 million kirana stores where FMCG products are distributed. These continue to contribute close to 85% of sales—particularly in rural markets and tier II-III markets.Rural BalanceHowever, kiranas are fast losing out to quick commerce in big cities, industry executives said.“Diwali sales are not catching up for kirana trade, and we don’t expect this year’s (Diwali) sales to match that of last year’s,” said a spokesperson for All India Consumer Products Distributors Federation that represents over 400,000 FMCG distributors.“There is a month-on-month 25-30% decline in sales at kirana stores on account of quick commerce in cities where these platforms are operating,” the person said.Zomato-owned Blinkit, Swiggy Instamart, Zepto, Big Basket-owned BBNow and Flipkart Minutes, which deliver essentials and groceries to customers’ homes within 10-12 minutes, have been growing and expanding their reach significantly, especially in large cities, for the last several months. 114559302“The reason why quick commerce is doing well is because it serves a certain consumer shopper need – convenience,” said Ritesh Tiwari, chief financial officer at Hindustan Unilever (HUL). The maker of Dove soap and Red Label tea said in its earnings call that it is stepping up investments and strengthening its partnership in ecommerce.“We have a segregated portfolio (for ecommerce), without any significant overlap to modern trade or general trade,” Tiwari said. “We have designed our portfolio and our promotional incentives to ensure we stay competitive in quick commerce. Even though it’s a small part of our total ecommerce business, we want to win in every corner of the market.” 114559306While FMCG companies say they are splitting assortments by pack sizes, consumer preference and pricing to balance interests of kiranas, quick commerce and modern trade channels, the face-off between the former two channels has escalated in recent months.QCOMM THE DIFFERENTIATOR“Demand moving to quick commerce is an industry-wide phenomenon, and sales to distributors are billed according to their sales in the market,” said Tarun Arora, chief executive of Zydus Wellness, which makes Sugar Free sweeteners and cookies. “While we are seeing some pressure on small retailers and, in turn, on urban distributors, impacted by reduced growth in general trade due to quick commerce, the former remains key to the FMCG business.”

ET Intelligence Group: ITC's September quarter performance was characterised by a strong uptick in revenue, but a sharp profitability retreat. While the standalone topline rose 16% to cross the ₹20,000-crore mark, driven by agri and hotel business segments, the operating profit margin dropped 330 basis points to 31.1% and the net profit rose 3%.One basis point is a hundredth of a percentage point. Raw material cost inflation was the single biggest factor that hurt the margins. The raw material cost surged 29% year-on-year led by the rise in prices of leaf tobacco and wood. The raw material cost as a proportion of sales rose from 40.2% in the same quarter last year to 44.6% this year.The cigarette business - contributing 40% to ITC's top line and 80% to the bottom line - posted a 7% rise in revenues. However, the segment's margins dropped 100 bps due to severe cost escalation of leaf tobacco prices despite measures such as cost rationalisation and price increases.Except for the hotel business, all other segments suffered a decline in profitability. The hotel business revenues grew 12% on a high base quarter with over 130 bps improvement in margins. Food & beverages, retail and weddings drove the growth in the segment.114563936The agribusiness revenues surged 47% on the back of leaf tobacco and value-added products like coffee, fruits, vegetables and spices. However, the profitability dropped by 120 bps. The FMCG business revenues grew at a modest 5% with the notebooks segment impacted by high base effect and opportunistic play by local brands in the wake of a sharp drop in paper prices. As a result, the segment margin dropped 37 bps to 7.9%.The paper & packaging business was the worst-performing segment with a 2% growth in revenues and a 23% drop in profit. Unseasonal rains adversely impacted the wood availability, quality and procurement price. The segment witnessed subdued realisation amidst a surge in domestic wood prices and ocean freights. This led to the margin declining by 380 bps. Overall, the company's performance was adversely impacted by subdued demand conditions, unusually heavy rains in certain parts, high food inflation and sharp escalation in certain input costs.With modest gains of nearly 9%, the ITC stock has underperformed the benchmark index over the past year. The ITC stock closed 1.8% lower on Thursday in anticipation of a subdued quarterly show. The actual performance does not offer a strong sign to reverse the lukewarm market sentiment in the near term.