FMCG Q4FY18: Sector Expectations
The Hope Of Sustained Recovery
It’s that time of the year again, analysts making calls to companies, distribution agents, sharpening pencils, updating excels and tweaking estimates to prepare for the quarterly earnings. For companies in the FMCG Sector, the task a little more difficult than the others because comparison of performance with prior quarters would be iffy due to the various distortions in the base variable.
FMCG sector earnings were most impacted by Demonetization & GST Related hiccups last year. Demonetization took place in Q3FY17 & the GST Impact was felt in the latter half of Q4FY17 & all of Q1FY18.
If that isn’t enough, GST rates for a large swathe of daily consumption items were revised lower in Nov 2017, so Q4FY18 will have the first full qtr impact of lowered prices and expectedly higher offtake.
Q3FY18 was the quarter where things started to look up. Almost every consumer company reported better than expected results; coming off a very favorable DeMo base. Margins improved due to benign raw material costs, rationalized spends and the GST related dip in H1FY18 saw some sequential respite.
Most importantly, there was a heightened sense of optimism in the Management commentary post earnings. For instance, Hindustan Unilever, in their Q3 earnings statement said “Expect Gradual Recovery in Demand to Continue” vs “In a challenging business environment, we delivered strong overall performance” just a quarter ago. Hence, the key expectation from the FMCG sector this qtr is sustained recovery and positive management commentary.
Volume Growth Trend & Expectations
As for the numbers, the sector, as a whole, is likely to see mid-single digit volume growth in Q4FY18. Additional GST rate cuts in Nov-17 led to price cuts across products may further increase offtake and aid volume growth. The business environment looks favorable now than ever before. Post DeMo and GST drubbing, the distribution channels seem to have recovered, especially Wholesale & Army Canteen Stores.
The industry seems to have sized up the scale & limitations of its fiercest competitor in recent times, Patanjali. That’s visible in HUL, GCPL & Dabur’s improvement performance in the areas they were most affected, viz, Soaps, Honey & Toothpastes.
Q4FY18 Expected Growth
Keep an eye on the margins for the FMCG sector this quarter. There may be come divergence b/w food and Home and Personal Care companies. While prices of Crude, TiO2, VAM and Copra have seen a sharp increase while that of Flour, Sugar, Maida and Milk have seen flat/negative inflation. The Paint & Bldg Pdt Cos have taken price hikes of 5.5-6% to account for the increase in Crude to protect margins.
For companies like Dabur, Emami, Marico and Britannia who do have small exposure to the MENA region, the street expects some improvement in reported results from the international business given a favorable base.
FMCG Sector Valuations
However, the big question that begets answering is, what price are investors paying for this increased optimism? At 45X FY19e; the sector does trade at elevated valuations, but if these companies meet the street’s expectations with a hope for some more in the future, there’s no reason for investors to worry about the top dollar they’re paying for growth, opportunity and quality of management.
The Hope Of Sustained Recovery
It’s that time of the year again, analysts making calls to companies, distribution agents, sharpening pencils, updating excels and tweaking estimates to prepare for the quarterly earnings. For companies in the FMCG Sector, the task a little more difficult than the others because comparison of performance with prior quarters would be iffy due to the various distortions in the base variable.
FMCG sector earnings were most impacted by Demonetization & GST Related hiccups last year. Demonetization took place in Q3FY17 & the GST Impact was felt in the latter half of Q4FY17 & all of Q1FY18.
If that isn’t enough, GST rates for a large swathe of daily consumption items were revised lower in Nov 2017, so Q4FY18 will have the first full qtr impact of lowered prices and expectedly higher offtake.
Q3FY18 was the quarter where things started to look up. Almost every consumer company reported better than expected results; coming off a very favorable DeMo base. Margins improved due to benign raw material costs, rationalized spends and the GST related dip in H1FY18 saw some sequential respite.
Most importantly, there was a heightened sense of optimism in the Management commentary post earnings. For instance, Hindustan Unilever, in their Q3 earnings statement said “Expect Gradual Recovery in Demand to Continue” vs “In a challenging business environment, we delivered strong overall performance” just a quarter ago. Hence, the key expectation from the FMCG sector this qtr is sustained recovery and positive management commentary.
Volume Growth Trend & Expectations
As for the numbers, the sector, as a whole, is likely to see mid-single digit volume growth in Q4FY18. Additional GST rate cuts in Nov-17 led to price cuts across products may further increase offtake and aid volume growth. The business environment looks favorable now than ever before. Post DeMo and GST drubbing, the distribution channels seem to have recovered, especially Wholesale & Army Canteen Stores.
The industry seems to have sized up the scale & limitations of its fiercest competitor in recent times, Patanjali. That’s visible in HUL, GCPL & Dabur’s improvement performance in the areas they were most affected, viz, Soaps, Honey & Toothpastes.
Q4FY18 Expected Growth
Keep an eye on the margins for the FMCG sector this quarter. There may be come divergence b/w food and Home and Personal Care companies. While prices of Crude, TiO2, VAM and Copra have seen a sharp increase while that of Flour, Sugar, Maida and Milk have seen flat/negative inflation. The Paint & Bldg Pdt Cos have taken price hikes of 5.5-6% to account for the increase in Crude to protect margins.
For companies like Dabur, Emami, Marico and Britannia who do have small exposure to the MENA region, the street expects some improvement in reported results from the international business given a favorable base.
FMCG Sector Valuations
However, the big question that begets answering is, what price are investors paying for this increased optimism? At 45X FY19e; the sector does trade at elevated valuations, but if these companies meet the street’s expectations with a hope for some more in the future, there’s no reason for investors to worry about the top dollar they’re paying for growth, opportunity and quality of management.
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