FMCG: After decade-low volume show in Q4, June qtr to see further pain

Topics Q4 earnings | FMCGs | FMCG stocks

While the situation is unprecedented, most companies, including from other sectors, expect rural to recover faster than urban India
Although the fast-moving consumer goods (FMCG) sector is in better shape, it could not escape the pain arising from Covid-19-led disruptions. The average volume fell to decade-low levels in the March 2020 quarter (Q4FY20), and the April-June (Q1FY21) period is likely to be even worse. 

The Covid impact

In Q4FY20, the average volume of eight FMCG companies declined by about 12 per cent, following disruptions in the supply chain. According to Vishal Gutka, vice-president at PhillipCapital, “Though contraction in volumes in Q4 was mainly because of supply-chain issues — a one-time impact — the volume performance was the worst in a decade.” The volume decline was much more than the fall seen during the demonetisation (December 2016) quarter, as well as the goods and services tax or GST implementation period (mid-2017).

Many analysts also believe the volume performance in Q1 of FY21 would be the FMCG sector’s worst ever, even as companies have ramped up production. 

According to Shirish Pardeshi, analyst at Centrum Broking, “Given half the Q1FY21 period was under complete lockdown, we expect volume offtake to be weaker than the March 2020 quarter, when the lockdown was for seven days.”
The packaged foods and other essential segments are expected to see better offtake, he said. The beauty and personal care segments (other than hygiene) are expected to remain under pressure as seen in Q4FY20.

 

 
Marico’s Q1FY21 update, announced last Friday, underlined this trend. The owner of the popular Parachute brand of hair oil expects Q1 domestic volumes to decline by low double digits (11-14 per cent), against a 3-per cent fall in Q4FY20. Marico’s Saffola edible oil, which had seen 25 per cent volume growth in Q4, is likely to see strong traction in Q1, as well. 

Britannia and ITC’s FMCG segment, too, have been outliers, as they witnessed over 20 per cent growth in April and May, said HDFC Securities in its report. In Q4 also, with up to 10.8 per cent top-line growth, Britannia and Nestlé, which are into packaged food, were outliers. 

Other FMCG majors, including Hindustan Unilever (HUL), had seen a fall in net sales in Q4, which also percolated through the bottom line.
Varun Singh, analyst at IDBI Capital, confirmed this trend. He said: “While discretionary segments, such as beauty and personal care, would see further decline in volumes, there would be a moderate impact for hygiene and food items, other than out-of-home consumption.” HUL’s management, during its Q4 earnings call, too, had highlighted that the discretionary and out-of-home consumption categories would remain affected in the near term. This was due to a shift in consumer preference towards essentials.

Godrej Consumer Products — which this week said it expects mid-single-digit volume-driven domestic sales growth in Q1, led by the household insecticides and hygiene segments — would also benefit from a low base. The company’s domestic volumes had contracted around 15 per cent Q4FY20 and grew a mere 5 per cent in the June 2019 quarter. Its other discretionary segments, such as hair colour and air freshener, as well as some international operations, remain under pressure. 

While the situation is unprecedented, most companies, including from other sectors, expect rural India to recover faster than urban India. Until the outbreak of Covid-19, rural demand (36 per cent of FMCG sales) was under pressure. However, factors, such as the limited spread of Covid-19, the government’s focus on the scheme under the Mahatma Gandhi National Rural Employment Guarantee Act, reverse migration of daily-wage labourers, good rabi crop, and normal monsoon, bode well for rural India.
According to Nielsen, the consumption rate in rural India had already reached 85 per cent of pre-Covid levels in May, vis-à-vis 70 per cent in urban markets. The trend in June has improved further, analysts said. 

Nielsen also estimates around 5 per cent growth in the overall FMCG segment over the next nine months with rural growth outpacing urban areas by about 2x, reversing the trend of the past two years. 

“The impact of cyclones and heavy rainfall in some parts, however, remains to be seen,” Pardeshi of Centrum Broking cautioned. 

Among a few silver linings are lower input costs and cost-efficiency measures undertaken by FMCG companies. 

These are expected to partly soften the impact of the subdued top line in Q1.


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