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Business News/ Markets / Mark To Market/  Unilever brings a reality check for starry-eyed FMCG shareholders

Unilever brings a reality check for starry-eyed FMCG shareholders

Unilever’s comments on emerging markets including India not very encouraging
  • ITC and Marico also said that operations are affected, and capacity utilization is low
  • When HUL announces its March quarter results on 30 April, investors will be keenly watching its volume growth. (Mint)Premium
    When HUL announces its March quarter results on 30 April, investors will be keenly watching its volume growth. (Mint)

    Hindustan Unilever Ltd’s (HUL’s) parent, Unilever Plc., said volumes grew just 0.2% in the March quarter. That apart, Unilever’s comments on emerging markets, including India, were not particularly encouraging. The firm said: “Lockdown measures in India commenced from mid-March, followed by a strict national lockdown, severely limiting the flow of goods and leading to a decline in South Asia."

    “Growth in India was impacted by both the slowing market and the lockdown implemented at the end of March, which stopped production and shipping for a number of days," added Unilever.

    Following the comments, HUL shares fell nearly 3% on a day when the benchmark Nifty 50 index rose by 1.4%.

    Better than others.
    View Full Image
    Better than others.

    Needless to say, when HUL announces its March quarter results on 30 April, investors will be keenly watching its volume growth. For the first three quarters of FY20, the company’s volume growth was steady at 5% for each quarter.

    While growth has been sluggish for a while, investors have taken refuge in stocks of fast-moving consumer goods (FMCG) companies, since the markets started correcting sharply owing to covid-19.

    Investors are taking comfort in the fact that companies selling essential products during the lockdown are better off than firms incurring complete loss of revenues. Little wonder then that shares of HUL and Nestlé India Ltd have touched new 52-week highs this month.

    However, it’s not as if the total revenues of FMCG companies are protected in the shutdown. Within the consumer products portfolio, some products are considered less essential. Further, companies are operating at lower capacity, which will eventually reflect in the numbers.

    On Thursday, ITC Ltd said its factories in India were operating anywhere between 20% and 60% of their capacity, and that only 60% of them were operational.

    “While operations at most of the units have scaled up reasonably, a few units continue to grapple with local restrictions and labour unavailability," said Marico Ltd referring to its India operations.

    Depending on the lower capacity at which companies are operating, revenues will be hit to that extent. “It isn’t that people think it is all rosy for FMCG companies, but the degree of impact is expected to be lower compared to other industries," said an analyst with a domestic institutional brokerage firm, requesting anonymity. Of course, most companies also have no issues related to debt, and have strong global parents.

    Having said that, investors should be cautious since it is difficult to correctly evaluate the financial impact of covid-19 on companies. The extended lockdown also means that the June quarter results will be worse than the March quarter ones.

    Coming back to HUL, investors’ rush to safety has pushed valuations even higher. Its shares trade at a pricey 58 times estimated earnings for FY21, according to Bloomberg data.

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    Pallavi Pengonda
    Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Updated: 24 Apr 2020, 01:01 AM IST
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