Q1 impact of covid: Some FMCG firms are better placed than others1 min read . Updated: 14 Jul 2020, 07:44 PM IST
- It is extremely challenging to estimate the earnings impact for April-June, as the country was under a strict nationwide lockdown for a good part of the quarter
- The journey has been rocky with the sector facing severe supply chain issues at the beginning of the covid-19 crisis
While the broader market has fallen about 13% so far this year, the Nifty FMCG index is up about 3%. That’s hardly surprising as the outlook for companies engaged in the sale of essential items is comparatively better than other product categories in covid-19 times. But wide difference is expected in the performance of companies within the industry.
Among essentials, food is on top. Predictably, in-home packaged food consumption has spiked as Indians spent more time at home to protect themselves from the virus. Packaged food companies such as Britannia Industries Ltd and Nestle India Ltd are expected to perform far better than consumer firms whose products are somewhat discretionary (even within essentials) in nature.
In general, analysts expected Britannia to deliver the strongest growth revenue among FMCG companies, followed by Nestle. Godrej Consumer Products Ltd is likely to have the best India growth among home and personal care companies, according to Credit Suisse Securities (India) Pvt. Ltd analysts, with the home insecticides category picking up. Besides, the company had a weak Q4, and the low base may make Q1 numbers look decent.
“Hindustan Unilever Ltd’s organic business, ITC Ltd and Emami Ltd are likely to face the largest declines," Credit Suisse added. For HUL and Emami, the personal care segment is expected to be hit. ITC’s cigarette volumes are expected to decline sharply due to restricted movement. With revenues taking a big knock, companies have understandably resorted to cost-cutting. Analysts expected companies to curtail advertising spends substantially.“We forecast advertisement spend would go down over 250 basis points at an aggregate level. As a result, the cut in aggregate operating profit margins (excluding ITC and Varun Beverages Ltd) should be limited to 70 basis points year-on-year for our coverage," said Jefferies analysts. One basis point is 0.01%.
Since shares of most FMCG firms trade at high valuations, they also run the risk of being punished if results are disappointing. Having said that, given the flood of liquidity and the lack of good alternatives, investors may continue to favour consumer goods stocks.