There are hardly any triggers for FMCG stocks going ahead (Mint file)
There are hardly any triggers for FMCG stocks going ahead (Mint file)

For  consumer staples  firms, focus returns to demand slowdown

  • Investors must stay tuned to management commentaries on demand conditions in the upcoming June-quarter results season
  • Management commentary can offer meaningful clues on rural demand conditions, impact of liquidity tightness

The Union budget has not made life any easier for consumer staples companies, which means demand worries in the near term will continue to be a major overhang for them.

“Expenditure on rural schemes and disposable incomes for low-end consumption are largely unchanged (from the interim budget) in the absence of a fresh stimulus," pointed out Varun Lohchab of Jefferies India Pvt. Ltd in a 5 July note.

The imposition of a nominal tax on cigarettes is slightly negative for ITC Ltd. What needs monitoring for ITC now is whether the goods and services tax rates change in the coming months. Separately, the government raised customs duty on gold from 10% to 12.5%, which will make the yellow metal pricier. As a result, consumers may shy away from shopping for gold, which Titan Co. Ltd’s investors won’t appreciate.

More crucially, investors must stay tuned to management commentaries on demand conditions in the forthcoming June quarter results season. As such, expectations are not high, which is understandable after consumer staples firms threw up a tepid March quarter performance owing to a demand slowdown.

“We expect the aggregate volume growth of FMCG (fast-moving consumer goods) companies to further moderate in Q1 FY20 to ~5.3%, compared to ~6.1% in Q4 FY19 and 8.2% in Q3 FY19," wrote analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 3 July.

(Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

Some companies have indicated the emergence of some green-shoots in June even as the weak start to the quarter would likely mean restrained growth for the quarter as a whole, said analysts from Kotak Institutional Equities in a consumer staples June quarter preview report on 4 July.

Management commentary, therefore, can offer meaningful clues on rural demand conditions and the impact of liquidity tightness.

So far, commentaries are lukewarm. Quarterly updates of Godrej Consumer Products Ltd (GCPL) and Marico Ltd were not heartening. GCPL said its domestic volume growth was in mid-single digits in the June quarter, which is more or less in line with Street estimates. In its update, Marico said the June quarter was characterized by moderation in the overall demand environment.

In a nutshell, there are hardly any triggers for FMCG stocks going ahead. It’s worth noting here that the Nifty FMCG index has declined 1.8% so far this calendar year. In comparison, the Nifty 50 index has increased 8.7%.

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