Britannia, Asian Paints to lead FMCG pack in Q4

Overall volume growth unlikely but margin expansion will aid earnings

Amid continued weakness in both rural and urban demand, the fast moving consumer goods (FMCG) sector’s volume growth is unlikely to witness any meaningful uptick in the March quarter (Q4). Given that input costs remained soft for a large part of Q4, sales growth numbers will be pulled down by falling realisations, again.

Within segments, robust volume growth coupled with strong margin expansion will enable Britannia and Asian Paints to post sector-leading revenues as well as earnings growth in the quarter under review. According to Bloomberg consensus estimates of the top 10 FMCG firms (by market capitalisation), Britannia and Asian Paints are likely to post revenue growth of about 10 per cent each and earnings growth of 39.5 per cent and 27.6 per cent, respectively, over the March 2015 quarter. Notwithstanding the stabilising input prices that could curb gross margin gains, Britannia’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margins will be aided by increased share of premium products, while the cost rationalisation will boost Asian Paints’ margins.

Hindustan Unilever (HUL) is likely to maintain its overall volume growth in the five-six per cent range in Q4 as well. Despite passing on the benefits of lower input prices, its Ebitda margin is seen expanding, thereby aiding earnings growth of 8-10 per cent (adjusting for one-offs). For ITC, healthy growth in cigarette margins will fuel the overall profitability even as cigarette volumes could fall two per cent. While FMCG revenues will moderate due to soft consumption demand, the segment’s profitability will be a key monitorable.

Lifting of Nepal blockade in January-end will aid Dabur’s performance in the quarter, albeit partly. The management believes it could return to earlier volume growth of five per cent soon. Given the high overlap of its products with Patanjali, the company’s commentary on market share trends across segments will be important. On the other hand, Nestle and Colgate are likely to be the laggards in Q4, say analysts. Although Maggi has received a strong response after its re-launch, Nestle’s revenues as well as earnings are likely to decline in Q4 on the back of a high base (pre-Maggi ban) effect. Intensifying competition from peers such as Patanjali and Dabur will continue to put pressure on Colgate’s toothpastes volumes in the quarter.

Palm fatty acid prices are likely to continue to rise. Hence, promotional activities for soaps might come down over the next couple of quarters. This will benefit soap makers such as HUL, Godrej Consumer Products and Jyothy Labs, which will be able to reverse price cuts and gain from reduced competitive intensity. Overall, the implementation of the 7th pay commission, a normal monsoon, and the government’s push to rural economy are crucial factors that will aid performance of FMCG companies.