FMCG Q3 preview: Few catalysts for sales growth

Lower input costs will aid margins and investments in brands to keep volume growth stable for most firms

Benign input costs will aid margins and earnings of fast moving consumer goods (FMCG) companies in the December quarter, even as sales growth continues to be under pressure. Though the festive season is likely to aid growth for companies such as Asian Paints and Titan, part of this benefit will be offset by the impact of the Chennai floods, which lasted almost a week. This was evident in the Bajaj Corp results. The company's volume growth fell to multi-quarter lows, though margin gains led to a healthy bottom line.

Consumption demand in both rural and urban markets could take more time to recover, believe analysts. This will keep revenues under pressure. Notably, sales growth of FMCG companies is aided by volume growth in recent times, which continues to be largely stable. This is because most companies have reinvested gains from lower input costs in advertising and promotional activities, in order to compete efficiently and protect their market share. The volume growth trends this quarter will be similar to those in the September quarter. Any meaningful uptick in this metric is still some time away.

  “We expect Asian Paints, Britannia, Jubilant Foodworks, Page, Pidilite, Titan and United Spirits to post strong net profit growth, while Colgate, Dabur, ITC and Nestle are likely to post muted net profit growth, due to company-specific factors,” write analysts at Kotak Institutional Equities in a recent note.

Pricing deflation, though, continues in segments such as soaps and detergents, which witness heightened competition when input costs are lower. Analysts believe Hindustan Unilever (HUL)’s volume growth could remain in the five-six per cent band it posted in recent quarters. A lower base of last year will also provide some impetus to overall numbers. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins could expand by about 100 basis points, on the back of lower input costs and lower staff costs (higher in the base quarter due to one-off expenses). “We expect 6.5 per cent volume growth for HUL aided by a favourable base, partially offset by a delayed winter, Tamil Nadu floods and some up-stocking towards end-Q2”, says Richard Liu of JM Financial.

ITC, on the other hand, will continue to witness falling cigarette volumes for another quarter. Most analysts expect cigarette volumes to fall in high single digits on the back of a favourable base effect kicking in. This is because this metric contracted 13 per cent in the December 2014 quarter. The company’s FMCG business growth has been moderating in-sync with weak demand and the trend is likely to continue this quarter as well. While margins will be aided by strong profitability of cigarettes, higher tax rate and lower other income could restrict net profit growth, estimate analysts at IDFC Securities. Management outlook on other businesses such as hotels, agriculture, as well as the regulatory environment for cigarettes will be key.

Asian Paints is expected to benefit from uptick in festive demand, which would aid volume growth in the domestic business. Lower input costs will drive a 200 basis points improvement in the Ebitda margins. The company is likely to the post highest revenue as well as net profit growth among leading FMCG companies this quarter (see table).

Nestle India's results will not be strictly comparable to earlier periods as Maggi was re-launched in November 2015. The company's ex-noodles business (chocolates, beverages, confectionaries,milk, etc) too is likely to report muted revenue growth in the quarter in the wake of continued demand slowdown. Most analysts believe it will take another three-four quarters to attain its pre-ban sales levels. Overall, the company is likely to post weakest numbers among FMCG companies.

Dabur’s volume growth and revenues will be impacted by the political issues in Nepal for the second quarter in a row. These issues will hurt the company's beverages business and lead to a muted volume growth of one to three per cent in the quarter. The management, though has started utilising its other plants to make up for the Nepal production, believes things should normalise in the March 2016 quarter. The margin gains will be limited due to negative operating leverage on account of the Nepal issues. International business though is likely to post healthy growth in the quarter.