Friday, October 9, 2015

FMCG stocks tumble on looming fear of rural slowdown

On a day when the BSE Sensex was down 0.7 per cent, the BSE FMCG index ended down 1.04 per cent and was the biggest loser among sectoral indices. Share prices of companies such as ITC, Colgate Palmolive (India), Godrej Consumer Products, and Emami fell in the range of 1-2 per cent.

This is partly due to fears of a rural demand slowdown coming true in the September quarter. Bajaj Corporation, first among the fast-moving consumer goods space to announce its September quarter results, witnessed single digit volume growth of 8.34 per cent year-on-year despite a lower base.

Price cuts, ad spends

The company had reported a volume growth of 8.8 per cent in same quarter last year. The company derives around 40 per cent of its revenues from rural areas. Its volume growth has been consistently dropping since the March quarter.

Analysts fear a similar thing happening with other players, such as Colgate Palmolive, Dabur India, Hindustan Unilever, Britannia Industries and Nestle India, which are focussed more on rural areas than the rest.

Analysts don’t expect price cuts and higher advertising spends on account of lower input costs to prop up the volume growth of the space immediately. ICICI Direct expects FMCG majors, such as Dabur, Colgate, HUL, Marico and ITC (all FMCG) to witness steady volume growth of 6-8 per cent.

Religare Institutional Research expects muted sales growth for its universe, which includes companies, such as Asian Paints, Bajaj Corporation, Britannia Industries, Colgate Palmolive, Dabur India, Emami, and Godrej Consumer Products, among others.

“A rural slowdown due to weak rainfall, alongside limited urban demand, is likely to mute Q2FY16 sales growth for our consumer universe to 4 per cent y-o-y. This comes on the heels of a poor showing in Q1 as well, when sales grew just 1.8 per cent,” Religare said.

Operating margins are expected to improve but could have been better if there were not higher ad spends.

HUL results on Oct 14

India’s largest FMCG company Hindustan Unilever is expected to announce its September quarter results on October 14. Analysts expect HUL’s volume growth to be around 6 per cent — same as reported in the June quarter, primarily helped by its premiumisation strategy.

There is a downside risk potential to volumes as the company derives more than 50 per cent of its revenues from rural areas.

The company witnessed weak rural demand in the June quarter as well. Meanwhile, the company’s stock price was most stable among its frontline peers.

No comments:

Post a Comment