Photo: Mint
Photo: Mint

As rural stress hits earnings, consumer sector firms pin hopes on monsoon

Analysis of 6 firms shows they posted aggregate net profit growth of 7.33% for March quarter; in the year-ago period it was 17.19%

Continued stress in the rural segment dragged down the March quarter earnings of consumer sector firms, which are now hoping for a good monsoon for some relief. As spending habits take time to change, firms may not see any immediate pickup in sales, company executives and analysts said.

Six firms analysed by Mint posted an aggregate net profit growth of 7.33% for March quarter which was much lower than the 17.19% net profit growth seen in the year-ago quarter as consumer spending remained soft despite a perceived improvement in the economy as reflected by strong growth and lower inflation. In particular, the earnings of these companies reflected the impact of two consecutive years of drought.

“Nothing has changed significantly in the past 4-5 quarters; in fact, the situation has worsened as we are now factoring in the impact of two drought years," said Sachin Bobade, analyst, HDFC Securities Ltd and added that for the next two quarters also, nothing will change.

To be sure, there is some improvement seen sequentially. Also, margins have improved.

Aggregate net sales of Hindustan Unilever Ltd (HUL), Procter & Gamble Hygiene and Health Care Ltd, Dabur India Ltd, Emami Ltd, Marico Ltd and Godrej Consumer Products Ltd (GCPL) stood at 14,817.76 crore, up by 6.51% compared with the same period a year ago. This was better than the growth seen in the past two quarters of December and September, but less than the 10.07% sales growth seen in the year-ago March quarter.

Even operating profit margin, a measure that looks at the company’s operating efficiencies, continued to widen as companies gained from lower input costs and better cost management. It stood at 21.01% in the March quarter, an increase of 24 basis points from 20.77% a year ago. One basis point is 0.01% of a percentage point.

Nestlé Ltd was not included in the consolidated analysis as the firm’s year-on-year results are not comparable because of a hit in its sales and profit due to the withdrawal of Maggi for a few months in the last fiscal year.

Earning trends across the sector haven’t been consistent. For instance, at India’s largest consumer packaged goods firm by sales, HUL, volume growth slowed further in the March quarter to 4% as compared to the range of 6-7% seen in the past four quarters due to weakness in rural markets.

“The trend is clearly that rural has slowed down; now it is growing at less than urban. In the last quarter, rural was growing at the same rate as urban," said Sanjeev Mehta, chief executive officer, HUL, at a press meet at the firm’s Mumbai headquarters on 9 May while explaining that in the past, rural used to grow at twice the urban rate and since last year, the rural slowdown has only been exacerbating.

Rising crude and vegetable oil prices though helped the maker of Dove and Lux soaps, Surf detergent and Knorr soupy noodles, to improve its domestic sales growth to 3.5% in the March quarter from 2.9% in the December quarter. Meanwhile, peers such as Dabur, Emami, Marico and GCPL fared better.

“Except HUL, most fast moving consumer packaged goods companies (FMCG) companies have reported better volume growth," said Ruchita Maheshwari, analyst, India Infoline Group (IIFL) while explaining that HUL has a higher rural exposure compared to its peers.

Dabur, for instance, reported a volume growth of 7% in December quarter, while the volume growth seen for the fiscal year 2016 was 4.5%, laying to rest apprehensions of a company-wide impact of new rival Patanjali Ayurved Ltd, said analyst Ajay Thakur of brokerage Anand Rathi Share and Stock Brokers Ltd in a 29 April report.

Likewise, for Marico, which has gained market share in 80% of its portfolio, domestic business volume growth stood at 8.4%. The maker of Saffola and Parachute is expecting 8-10% volume growth for 2016-17.

Earnings of consumer goods firms reflect the volatility in consumer sentiment and the divergent mood across urban and rural markets.

According to the MNI India Consumer Sentiment Survey by the Deutsche Börse Group, consumer confidence rose to the highest in April since November last year but remains below the levels seen last year.

“The MNI India Consumer Sentiment Indicator rose 2% to 113.4 in April from 111.2 in March. Sentiment, though, was down 7.1% compared with the same month a year ago, and 6% below the series average," said a 10 May report which said that improvement in sentiments hangs on an expected turnaround in business conditions.

For consumer sector firms, the outlook though is largely dependent on monsoons. There will be some benefit from rising commodity prices. In the March quarter, prices of crude and palm oil started firming up. “Revenue growth will be in double digit by end of the fiscal year as value growth will come back and volume growth will continue to be there as demand revives given the good monsoons forecast," said Bobade.