FMCG companies' Q3 volume growth may be slowest in ten quarters

Topics FMCGs | FMCG firms | Nifty FMCG

Barring palm oil and related materials, prices of some key raw materials in the home and personal care segments, such as copra and mentha oil, were lower in Q3.
Fast-moving consumer goods (FMCG) companies, which posted a subdued volume performance in the July-September period, may end up with an even worse showing in the December 2019 quarter (Q3). Average volume growth of eight major listed companies is estimated to come at a 10-quarter low in Q3. 

These worries also reflect in the recent underperformance by the Nifty FMCG index. The index, which until recently was enjoying investors’ support despite pricey stock valuations, has shed about 4 per cent since the start of Q3, as against a 5 per cent rise in the Nifty50. Even though part of it can be attributed to improved investor sentiment towards other sectors, such as banks, weak volume expectations are an important factor for the underperformance.

A statement by Marico, in its Q3 update announced last week, underlines the setback to volume recovery hopes. According to the company, which is India’s largest hair oil player and the owner of Parachute brand, “Overall consumption trends during Q3 belied expectations of the beginning of a revival in sentiment which was built on the back of good monsoons and announcement of various government measures.”

In Q3, a delayed winter and a disruption in traditional general trade channel have worsened the pain for FMCG players, which are already facing demand pressure for many quarters. According to analyst estimates, average volume growth of top listed FMCG players in Q3 will be below 3 per cent, the lowest in the last 10 quarters. In the September quarter, the same was 3.2 per cent, and the June quarter had clocked 4.7 per cent volume growth.

While analysts say the delayed winter has impacted companies, such as Dabur, Hindustan Unilever and Emami, which have a sizeable winter portfolio, disruption in general trade is an ache for the entire sector, given that the channel accounts for more than 80 per cent of the industry’s revenue. 

Besides liquidity challenges, issues related to higher promotional offers to other trade channels, such as modern trade, cash & carry, and e-commerce by FMCG companies, have hurt the general trade channel. According to Shirish Pardeshi, analyst at Centrum Broking, “Though consumers, too, have preferred the other than general trade route, limited shelf size and the geographical reach of these modern channels have restricted FMCG product offtake.”

Source: Companies and brokerage reports

Down-trading activities (shifting to lower-priced product alternatives) by customers because of the overall weak economy has also hurt volume growth. Companies with less rural presence, such as Nestlé and Godrej Consumer Products (has indicated over mid-single-digit volume growth in Q3), could report better volume/top-line growth than players with high rural exposure as the trend of urban growth outpacing rural is estimated to have continued in Q3.

Apart from volumes, the lull demand environment is expected to have hurt sales realisation and operating profitability/gains of FMCG companies, thanks to higher promotional offers. According to analysts at Motilal Oswal Securities, the weak demand environment saw a rise in competitive intensity in the form of promotions and price-offs. Thus, the benefits of low material costs (mainly non-food items) are now not expected to be high as seen in previous quarters.

Barring palm oil and related materials, prices of some key raw materials in the home and personal care segments, such as copra and mentha oil, were lower in Q3. 

However, higher prices of agri-commodities, such as wheat and sugar, will limit margin gains of food companies, such as Britannia and Nestlé. Yet, some support from faster growth of pricey-premium products may have a positive rub on margins. And, at the net level, lower corporation tax rates (announced in September last year) will also boost net earnings of many FMCG companies.

How the New Year pans out in terms of rural demand will be known once FMCG companies announce their Q3 results and provide guidance on future growth. Overall, given the pricey valuations and likely delay in recovery of demand, a further correction in stock prices is not ruled out. Though some analysts expect demand to revive owing to good rabi crop and the government’s welfare schemes, the jury is out on this.

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