Not only has the likely pressure on earnings for the automobile, hospitality, aviation, banks, and NBFC sectors has made
According to a JPMorgan report, “The valuation divergence (between consumer staples and leading indices) is likely to stay with premium multiples (of FMCG) being attributed to earnings resilience and better visibility on long-term growth potential.”
Besides essential or the daily-use nature of products, likely margin support from benign input prices and cost-efficiency measures will confine the impact of the crisis on overall earnings. How individual firms manage their distribution (given the labour shortage) would be a key differentiating factor.
Though distributors may demand extended credit period amidst the liquidity issue, G Chokkalingam, founder and managing director of Equinomics Research and Advisory believes that given the supply-driven business of FMCG, which results in higher realisation and zero-debt position, managing working capital is unlikely to be a challenge for the companies. In fact, many FMCG companies have surplus cash and bank balance in their books (after accounting for debt), which itself provides significant comfort in the current situation. However, near-term earnings impact will vary depending on the product mix and export dependence.
With expectations of low income, demand for discretionary/non-essential items will remain low. Further, a partial or complete lockdown
in key overseas markets
such as South Africa, Indonesia, and Bangladesh will further dent the top line.
Thus, firms with higher revenue share of essential items and lower revenue contribution by overseas markets
are expected to perform better, say analysts. Most sectors will limp back to normalcy over the next 2-3 quarters, believe experts, indicating that FMCG companies with better visibility will remain in demand.
For now, Hindustan Unilever, Britannia and Nestle are some analysts top pick in the FMCG space.