Weak Q4 results may give FMCG stocks a reality check on valuations
Slowdown in the rural economy is seen hurting consumption growth
The slowdown in consumption demand is well known, but valuations of fast moving consumer goods (FMCG) companies have remained lofty. However, if these muted demand trends rub off on the March quarter (Q4) financial results of these companies, investors may well finally wake up and smell the coffee.
After reporting strong volume growth for the past six quarters, growth is expected to falter in Q4. For Q4 FY19, analysts at Edelweiss Securities Ltd estimate revenue and net profit growth of 8.7% and 9.2%, respectively, far lower than the 14.3% and 14.8% year-on-year growth reported in the December quarter. These are aggregate numbers for FMCG companies on whom the brokerage firm has research coverage.
One of the reasons for this moderation in demand growth expectations is the slowdown in the rural economy. In fact, the rural growth multiplier to urban multiplier has come down sequentially to about 1.1 times from 1.3 times in the December quarter. That apart, an extended winter also means that demand for products that picks up with rising heat took some beating. Additionally, some hit on the demand can also be explained by the tight liquidity conditions.
“Volume growth for most staples will soften in Q4FY19," wrote analysts from Jefferies India Pvt. Ltd in a report on 2 April. Within its coverage universe, the broker expects Marico Ltd to outperform with 9% year-on-year volume growth helped by a favourable base. This would be followed by Britannia Industries Ltd and Colgate-Palmolive (India) Ltd with 8% and 7% year-on-year volume growth, respectively.
In its pre-quarterly update on 2 April, Marico said: “While rural grew ahead of urban in the traditional channel, we believe consumption trends should be closely monitored in light of some sluggishness in wholesale in March." The company said that it witnessed stable demand conditions and healthy offtake growth on the back of the competitive strength of its franchises.
Analysts expect Hindustan Unilever Ltd (HUL) to clock a volume growth of about 5%. The base March 2018 quarter volume growth was much higher at 11%, representing a high base.
On the positive side, margins may get a leg-up because of some softening of input costs compared to the December quarter.
For investors, management commentary on demand outlook would be crucial to follow. Besides, a good monsoon may bring cheer for FMCG companies on expectations of better rural demand.
As pointed out earlier, valuations of consumer goods companies are high. According to Bloomberg, the Nifty FMCG index trades at 35 times estimated earnings for FY20. In that sense, the Q4 results could offer investors a reality check as far as valuations are concerned.
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