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Strong growth of FMCG companies in Q4 will likely be a mirage

India’s largest FMCG firms, including those with high exposure to rural markets such as Hindustan Unilever (HUL), Dabur and Emami, are waiting for a boost in rural demand to help revive sluggish growth in volumes and earnings, according to analysts tracking their stocks. Photo: Indranil Bhoumik/MintPremium
India’s largest FMCG firms, including those with high exposure to rural markets such as Hindustan Unilever (HUL), Dabur and Emami, are waiting for a boost in rural demand to help revive sluggish growth in volumes and earnings, according to analysts tracking their stocks. Photo: Indranil Bhoumik/Mint

Investors, however, have found some comfort in the defensive Nifty FMCG index, which has risen by 4.5% in a month

Covid-19 infections are soaring and the broader Nifty 50 index is feeling the heat, falling by around 4.8% over the last month.

Investors, however, have found some comfort in the defensive Nifty FMCG index, which has risen by 4.5% in a month. In the upcoming results season, when consumer staples’ firms announce their March quarter earnings, management commentary will be crucial. Investors should note what companies have to say about the impact on demand due to rising cases and related curbs on mobility. This would have a bearing on future earnings of the companies.

“We believe management commentary around local restrictions, input price trend and product price action will hold the key for stock price performance," wrote analysts from Jefferies India Pvt. Ltd in their consumer Q4FY21 preview report on 7 April.

Optically good
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Optically good

For what it’s worth, year-on-year revenue growth is expected to be robust. This is on account of a favourable base in the year-ago quarter, due to the disruptions and lockdown at the end of 2019-20. Against this backdrop, analysts said that looking at two-year compounded annual growth rate (CAGR) trends may be helpful. “Reported growth comparables (year-on-year) in Q4 will likely be strong for most companies given the covid-constrained weak base; we stick to two-year CAGR numbers to assess underlying trends," said a report from Kotak Institutional Equities. The broking firm added that on a two-year CAGR basis (organic), it expects consumer staples firms under its coverage to register 6.2% revenue CAGR in Q4FY21.

Jefferies expects reported growth for its staples universe to rise to a multi-quarter high of 19% year-on-year. “However, two-year CAGR is <6%, broadly similar to Q3 levels. Rural growth is likely to stay ahead of urban. Emami Ltd, Dabur India Ltd, Godrej Consumer Products Ltd and Marico Ltd should grow the fastest on a year-on-year basis, with around 30% growth rate," Jefferies’ analysts added.

In a recent update on the Q4, Marico said its India business delivered a very strong double-digit volume growth. Note that Marico’s India volume had declined by 3% in Q4FY20. Analysts expect Hindustan Unilever Ltd to report around 20% year-on-year revenue growth on an organic basis. But investors need to watch how gross margins behave given the input cost pressures. In fact, inflation pressure in key raw materials is likely to weigh on gross margins of many firms in the March quarter.

On the profitability side, Kotak expects raw material inflation to weigh on gross margin for Tata Consumer Products Ltd, Marico and HUL. Even so, earnings before interest, tax, depreciation and amortization (Ebitda) performance may be relatively better. “Operating leverage and cost savings should drive year-on-year Ebitda margin expansion for most staples companies (barring Marico and TCPL)," said Kotak analysts.

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