BackEarnings at consumer firms seen picking up
Analysts estimate profit growth of 10.2-17.9% and sales growth of 12.2-17.6% in the September quarter
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Mumbai: After almost a year of subdued revenue growth, consumer companies are expected to see a pickup in the September quarter, led by an improved offtake in urban markets and a fall in inflation levels.
A Mint survey of six brokerages—Anand Rathi Shares and Stock Brokers Ltd, India Infoline Ltd (IIFL), Kotak Institutional Equities, Motilal Oswal Financial Services Ltd, Prabhudas Lilladher Pvt. Ltd and Edelweiss Securities Ltd—shows analysts estimate profit growth of 10.2-17.9% and sales growth of 12.2-17.6%.
“The consumer sector is expected to report revenue growth of approximately 15% in 2QFY15 against 11-12% over past four quarters," said Aniruddha Joshi, analyst at Anand Rathi Shares and Stock Brokers.
Early signs of recovery are being seen in the home and personal care segment and in categories such as soaps, which have shown better volumes in August when compared with preceding months. In the past year, soaps had reported negative volume growth and, according to the latest data from market researcher Nielsen for the month of August, it’s now showing positive growth, said Vivek Gambhir, managing director at Godrej Consumer Products Ltd.
The revival is led by urban demand, even as rural demand is subdued due to erratic rainfall and weaker growth in incomes.
“There is a deficit of 15% in the overall monsoon, and in parts of Maharashtra there were areas where the deficit was up to 30%; therefore, rural demand has been sluggish," says Parag Desai, director, sales and marketing, Wagh Bakri tea group, explaining that despite positive signs and policy announcements, the rural pickup will come with a lag. “By December, we will know what is happening. The signals are positive, there is optimism in the air and we believe it’s just a matter of time before spending takes place," said Desai.
A study by market research firm IMRB threw up similar findings. Sentiments of urban consumers have improved but those of rural consumers have not seen a marked improvement, said its research on Indian consumption for May-July 2014, which compared sentiments with the same period a year-ago.
IMRB says fast-moving consumer goods consumption in urban India, in volume terms, was up 7% in May-July over a year ago. In rural India, it fell 7% in the same period.
With urban volume growth picking up, “the gap between urban and rural growth continues to shrink as the latter has been moderating. However, innovation and distribution will help garner decent volume growth for Emami, Marico and Dabur," said an Edelweiss Securities consumer preview report by analysts Abneesh Roy, Pooja Lath and Tanmay Sharma.
To be sure, it may be too early for the improved sentiments to show up in earnings.
For instance, Hindustan Unilever Ltd, the country’s largest consumer packaged goods manufacturer, which announces its results on Monday, is expected to register a volume growth of 5% in the September quarter, according to a 10 October report by Religare. Volume growth for the maker of Rin and Surf detergents and Lux and Dove soaps was higher in the June quarter at 6%. Volume growth is still way below its peak when it averaged close to 12% in 2011-12. “Our channel checks and management interactions indicate no meaningful pick-up in demand trends yet," said the Motilal Oswal report.
During the quarter, prices of key raw materials fell. Palm oil, a key ingredient of soaps, was down 14.1% against the preceding quarter, while titanium-dioxide, menthol oil, kardi oil and light liquid paraffin, too, were cheaper, Motilal Oswal said.
The benefit of lower prices will be felt only in the second half of the fiscal, said analysts. As such, operating profit margins of GlaxoSmithkline Consumer Healthcare India Ltd, Nestle Ltd, Emami Ltd, and Dabur India Ltd are likely to be under pressure, the Motilal Oswal report said.
“Crude prices have dropped; it will take a quarter to trickle down. It should help costs of packaging materials come down," said C.K. Ranganathan, managing director, Cavinkare Pvt. Ltd, which makes Chik and Meera shampoos. “It’s too early to say whether it will be passed on to the consumer," he added.
To be sure, in the September quarter, firms raised prices across categories. “The worst is over. As far as earnings are concerned, we won’t see a marked difference. But as we go into quarter three, we are confident of an improved second half for the fiscal," said Gambhir.
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