overall margins: Consumer goods firms expect margins to improve significantly over next three quarters

overall margins: Consumer goods firms expect margins to improve significantly over next three quarters

Top listed consumer goods companies such as Hindustan Unilever (HUL), Dabur, Marico, Tata Consumer Products and Havells have said in recent earnings calls they expect margins to improve significantly over the next three quarters of the current fiscal with input cost further moderating out and in some cases more than what they had initially projected, most of which will be ploughed back into advertising and promotional (A&P) investments.

Margins are on an upward trajectory for most companies from December quarter with year-on-year reduction in inflation and raw material costs. This led to a recovery in advertising and promotion spending as well which last quarter almost touched at par with pre-Covid levels.

Marico chief executive officer Saugata Gupta said going forward from July-September quarter there will be further A&P increases while the company delivers operating margins of 20% plus – much higher than it had expected earlier. He said such margins will be generated not by cutting down on A&P spends year-on-year since it wants to generate demand.

Dabur chief executive officer Mohit Malhotra said the company saw gross margin expansion of 74 basis points (bps) during the April-June period with inflation softening, with the company reinvesting these gains into the business by significantly increasing the media spend. A basis point is 0.01 percentage point. Dabur’s media spends grew by 30% last quarter.
“With the moderation in inflation expected to continue for next few quarters, there will be a margin upside…For the full year, we expect improvement in gross margins to continue. The gross margin expansion will be allocated towards increasing our advertising & promotion spends, and is also expected to result in improvement in our operating margin on an annualised basis,” said Malhotra.Margin indicates the percentage profit a business makes on a sale after factoring the expenses. Most companies had r


Margin indicates the percentage profit a business makes on a sale after factoring the expenses.

esorted to cost management, including A&P spending cuts since Covid to improve their margins amid major inflationary pressure and a slowdown in demand.One of the largest advertisers in the consumer goods industry, HUL’s chief financial officer Ritesh Tiwari said “media deployment” which saw a steep reduction during the high inflationary period has started to normalise and is now at 95% of June quarter of 2019. He said the company has spent an additional Rs 200 crore in A&P sequentially in June quarter over the March quarter.Tiwari said at the peak of inflation in September quarter of 2022, there was a 600 bps impact on HUL’s gross margin. He said the company has already recovered 400 bps of gross margin in the last three quarters from October 2022 till June 2023, with almost a good portion of this gross margin improvement having gone behind A&P.

“So, we have dialled up 300 bps of investment in A&P…Of course, where required, we did lean in with price reduction, with more amount of grammage to be filled back, and we will see the impact of these changes in consumer behavior and volumes in times to come. Typically, this takes 2 to 3 quarters for the whole thing to stabilize,” said Tiwari. For Tata Consumer Products, A&P to sales for the India business was at 7.1% in June quarter as compared to 6.6% in the same period last year.

Chief executives have also said in earning calls that demand – including discretionary — will improve in the second half of the fiscal with sales volumes for fast moving consumer goods continuing to improve for the second consecutive quarter in April-June.

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