There has been a demand slowdown for consumer staples in Q4. This is on the back of a slowdown in agricultural income with slower wage growth, prolonged winter impacting offtake of summer-centric products, and liquidity stress at the distributors’ end, among others have hurt the consumer sentiments. Volume gain benefits from lower goods and services tax (GST) are also now behind and rural growth pace has also come down. Analysts estimate consumer staple players to have clocked up to 7 per cent volume growth in Q4. On an average, the estimated volume growth would be around 100 basis points lower than December 2018 quarter.
The slack in demand warrants higher promotional spends either in the form of offering extra volumes or price discounts or direct advertising spends. This would hurt profitability and overall earnings. In Q4 too some analysts believe around 20-30 per cent of the reported volume growth would be on the back of free offers by companies.
“Our channel checks suggest there would have been promotional efforts in Q4 either in terms of extra grammage or price discounts. This could have helped overall top line growth of consumer staples in Q4,” says Nitin Gupta, analyst at SBICAP Securities. Nevertheless, benign input cost trajectory in Q4 would have helped to ease some margin pressure.
However, the rising crude oil prices may skew the picture as far as raw material costs are concerned. Also tepid demand situation gives very little freedom to companies
for price hikes. In case of Asian Paints, for instance, CLSA believes rising input cost prices and concern on price hikes amid weak macros (indicating demand situation) would weigh on margins.
In this scenario, it would be tough to justify the rich valuations for FMCG companies.
This is especially the case if demand fails to recover after the elections. Price-to-earnings ratio of BSE FMCG index currently stands at 28 times FY21 estimated earnings, around 75 per cent higher than that of BSE 500 universe. Some brokerages have indicated earnings cut for FY20. For instance, IIFL has cut its earnings estimates by 1-3 per cent in case some staple companies for FY20 and FY21 and said further cuts are possible if growth remains weak.