Commodity correction to boost earnings of FMCG companies

But volume growth expected to be muted as much-anticipated urban recovery gets delayed by a few quarters

Consumer goods companies will have to wait a little longer for a good set of quarterly numbers. Results for the third quarter (October-December) of the current financial year are expected to be much like it was in the second quarter, with volume growth muted.

The consensus estimate of leading brokerages, as compiled by BS Research, shows revenue growth for the third quarter is expected to be in the region of 12 per cent, in line with the second one. However, net profit growth will be higher at 13 per cent, led by a commodity correction in the December quarter, almost 500 basis points (bps) higher than the growth reported in the September quarter.

Kaustubh Pawaskar, consumer goods analyst at Mumbai-based brokerage Sharekhan, says: “The fall in commodity prices has been fairly steep in the third quarter. Some benefit of this will be visible in the December quarter, with almost a 400-bps expansion in gross margins.”

Volume growth, however, will be only five to eight per cent, as consumers remain wary of splurging on goods, said analysts tracking the sector. “Volume growth seems to have bottomed out; further deceleration from current levels looks unlikely,” said Amnish Aggarwal, senior vice-president, research, Prabhudas Lilladher, in a note on the performance of fast-moving consumer goods (FMCG) in the third quarter. “The demand environment,” he added, “was benign, with a meaningful recovery in a couple of quarters.”

Analysts Krishnan Sambamoorthy and Aditya Joshi of Nirmal Bang also reiterate in their FMCG preview report for the third quarter that top line (revenue) growth for companies will be weak, with muted volume growth.

With top line growth not expected to be strong, companies are expected to put much of their attention on curbing costs. Advertising and sales promotion (ASP) expenditure for the third quarter is expected to be a little lower than the trend for the period, the festive one. Analysts say ASP could be lower by about 100 bps for the third quarter.

This festive period, in fact, was led less by traditional spenders such as consumer goods and telecom, and more by new-age categories such as e-commerce and handset makers. E-commerce alone is estimated to have brought Rs 200-300 crore of ad spends in  October 2014, which was when Dussehra and Diwali were celebrated. In November and December, too, it was largely e-commerce and handset makers that called the shots in terms of advertising.

The stock markets have already priced in this weakness in the consumer market, with the benchmark FMCG indices on both the BSE exchange and National Stock Exchange in the past month falling twice that of their respective benchmarks, the Sensex and Nifty. Generally, a defensive sector such as FMCG moves up in a bearish market.