Gupta’s concerns arise from the fact that most FMCG players have indicated a tapering rural demand. HUL, for instance, indicated that rural demand is now growing at 1.1 times that of urban versus 1.3 times earlier. Liquidity concerns at the distributors’ end, unemployment, and wage rates are some of the key issues taking a toll on rural consumption. This could hurt overall revenue prospects, given the rural regions account for 35-38 per cent of the consumer staples’ revenue.
To top it all off are the liquidity concerns faced by wholesale distribution channels. The wholesale distribution network adds up to a third of rural revenues for these companies.
However, investors need to bear in mind that Q4 volume growth trails healthy high single- to double-digit growth seen for most of FY19. On average, HUL, Britannia, and Dabur
posted 8-12 per cent volume growth in FY19. Therefore, the base effect, too, could weigh on their financials in 2019-20 (FY20). Analysts at Edelweiss Securities foresee about 100 basis points (bps) contraction in FY20: Volume for HUL
and Marico. Dabur
may see a sharper 450-bps volume decline. Though new product launches would help mitigate volume pressure, this could cap operating margin gains, given the commensurate increase in promotional spends. Therefore, the ability to implement price hikes looks slim at the moment.
That companies are targeting only a high single-digit volume growth, and stable to modest margin expansion reinforces the position of consumer staples with respect to pricing, says an analyst. Some experts, however, see the demand stress to be transitional. “The rural market is a key driver of consumption. We believe demand would improve in one-two quarters,” says Shirish Pardeshi, analyst at Centrum Institutional Research. However, he feels the valuations of FMCG stocks
are still high and may moderate in the near term.
Also, the outcome of the central election would be key for the industry. The brass of most FMCG companies believes the demand would revive after the elections.
Overall, long-term investors, with a stomach for some immediate volatility, can selectively bet on FMCG stocks.
For now, HUL, Marico, and Britannia are the top picks.