FMCG Q4: it’s all about volume growth
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Bajaj Corp. Ltd is not a bellwether for the FMCG industry but the recent sharp drop in its share price is a cautionary tale for optimistic investors. The BSE FMCG Index has risen by 20% since end-December, partly on relief that demonetisation’s effects are waning, the introduction of goods and services tax (GST) expected to benefit companies and the hope that consumer demand is up and about.
Bajaj Corp.’s share had risen by 21% as of last week, since end-December. On Monday, its share fell as investors were disappointed with the 1.9% decline in its sales growth over a year ago and a decline in profit. It operates in one segment of the FMCG industry, the light hair oils market.
According to the company’s investor presentation, hair oil industry sales in the fiscal year till February were up by 3.3% in volume terms, compared to 1.5% in the fiscal year till December. In value terms, growth has picked up to 1.2% compared to a decline of 0.3% for the same periods. That supports the theory that consumer demand has improved, at least in hair oils. Bajaj Corp.’s performance has slipped for reasons specific to the company.
What Bajaj Corp.’s results and the decline in the stock show is that investors are expecting FMCG companies to report good sales and profit growth. That means valuations will be tested if results disappoint, which is quite understandable, considering that the BSE FMCG index trades at a valuation of 42 times its trailing 12-month earnings.
The main focus in the March quarter will not be as much on profitability as it will be on volume growth. This quarter will give an idea of where sales growth is headed, post-demonetisation. The Street appears to be expecting value sales growth in the region of 7%, with volume growth in low- to mid-single digits, while price hikes contribute more to value growth. There are some cautious voices too, which predict sales growth at a lower level of around 4%.
While the number itself is one factor, investors will be keen to hear managements say they are seeing demand swing back and are gearing up for a much better year in FY18. A cautious sales growth outlook is not what they have pencilled in.
On the profit front, Ebitda (earnings before interest, tax, depreciation and amortisation) is expected to increase by around 7% and net profit by about 10% on an average. This could be lower if companies do not cover higher costs through price hikes, or end up spending more on advertising and publicity to get sales growth going. Staff costs could be another item that could see a higher than expected escalation. The price hikes taken by companies to offset higher costs should see them deliver on margins. Sales growth is where the risk of underperforming lurks.