Fewer hits than misses in FMCG as demand and supply concerns weigh

Topics FMCGs | FMCG companies | Coronavirus

People wearing protective masks shop at Kendriya Bhandar in the wake of coronavirus pandemic. PTI
The fast-moving consumer goods (FMCG) sector is believed to be faring better, given the daily-use products it sells. Expected margin gains from lower input costs, following the sharp correction in oil prices, adds to the belief. However, the road ahead may be tough, as demand and supply-related issues are bound to take a toll on their overall performance till the next quarter.

Although hygiene, home care, and packaged foods may witness higher demand, the lockdown will have a visible implication on the supply chain and overall demand.

Dhaval Dama, analyst at Equirus Securities, says: “A curfew or lockdown will impact the supply chain process, with labour shortage and disturbance in supply of raw materials. Distribution could also be impacted.”

Many FMCG firms have already been witnessing volume pressure since the past few quarters.

Concerns also arise due to the high revenue share of non-essentials such as beauty products, and household items such as room fresheners. As the government has only allowed the supply of essential goods such as groceries, milk, and hygiene products during the lockdown, the sale of non-essentials is likely to get impacted.

 

 
For instance, for Marico, Dabur, ITC, Emami, and Hindustan Unilever, essential products account for up to 35 per cent of their top line, according to analyst estimates. Nestlé and Britannia, though, come purely under packaged foods, and hence the impact may be lower.
A few like Dabur have also informed about the suspension of production of non-essential items till March 31 (may get extended).

Besides, even for essentials, organised players could face demand pressure as consumers may shift to lower-priced products amid the risk to income, say analysts. Income risk has resulted in fears of delayed demand recovery.

A key positive is that raw material prices have fallen, which could aid margins. Given the government's financial package for farmers and the poor, some push to sales is also expected for the companies mentioned above as rural India accounts for 30-50 per cent of their top line. However, it is unlikely to be enough to cushion the overall pressure on top line.

The surge in FMCG stocks on Thursday, and their outperformance vis-à-vis the Nifty over the past 10 sessions, might now be questioned. Moreover, valuations are still not cheap as the Nifty FMCG index is trading at an over 100 per cent premium to the Nifty.


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