July-Sept quarter might bring cheer for FMCG firms

Anticipated urban recovery likely to help fortunes of consumer goods companies

The second quarter of the current financial year could be a turning point for fast moving consumer goods (FMCG) companies, with the much anticipated urban recovery setting in.

Analysts tracking the sector say the three months ended on September 30 are likely to be the last of the muted quarters.

"I see the urban recovery setting in by the third quarter. The signs are visible with India topping the worldwide consumer confidence index recently and the improvement in sentiment reflected in the performance of the stock markets. Urban consumers are expected to react to these positive cues with a pick-up in spending likely by the December quarter. This is also the festive quarter," said Abneesh Roy, associate director, research, institutional equities, Edelweiss.

While this is good news for most companies, they can also take consolation that the quarter under review is likely to show some signs of improvement over the previous period. Revenue and profit growth is estimated to be slightly better than the first quarter, sector analysts said.

Consensus estimates of leading brokerage houses compiled by BS-Research shows that both revenue and profit growth for the second quarter will be 12-13 per cent. In the first quarter, revenue growth was about 11 per cent, while profit growth was about five to six per cent. Naveen Kulkarni, co-head, research, Phillip Capital, said: "While there will still be some pain, the quality of earnings overall will be better in the second quarter vis-a-vis the first. The key reason for pain will be that the gains made on the gross profit front because of lower input costs could be offset on the operating front due to higher advertising and promotional expenditure. However, I estimate volume and price-led growth to be on an even keel of about six to seven per cent each in the second quarter. This is a good sign because in the first quarter, the volume of growth was lower."

Some firms will outdo others
Analysts estimate that companies such as Asian Paints, Dabur, Marico, Emami and Jyothy Laboratories could report better numbers than peers in the second quarter, on the back of a higher base effect and pick-up in demand.

Consensus estimates of leading brokerage houses (as compiled by BS-Research) shows Asian Paints revenue and profit growth is 16.12 per cent and 17.76 per cent, respectively; Dabur is 13.74 per cent and 13.76 per cent; Marico is 22.20 per cent and 15.70 per cent, while Emami is 17.85 per cent and 13.32 per cent and Jyothy Labs is 17.85 per cent and over two times, respectively.

Mumbai-based Bajaj Corp. - maker of the popular Bajaj Almond Drops Hair Oil, which is endorsed by actor Kangana Ranaut - already reported a higher-than-expected 14.21 per cent and 11.34 growth in net sales and net profit respectively for the second quarter.

Bajaj Corp is among the first FMCG companies to declare its numbers every quarter. The company declared its numbers last week.

Roy of Edelweiss says that the improved performance was on account of better volume growth as well as prudent cost management by the company. "Bajaj's key brand, Bajaj Almond Drops, saw volume growth of 3.9 per cent in the second quarter versus a decline of one per cent in the first quarter.

This is a clear sign that the light hair oil market is recovering, which is a good signal. In other words, consumers are slowing shedding their inhibitions and picking up products. This should percolate to other categories."

According to market research agency IMRB, household consumption of FMCG products between May and July has recovered in urban areas from a deep slump it witnessed the same time last year.

FMCG consumption volume growth was up seven per cent between May and July 2014 versus a degrowth of 12 per cent seen last year. Value growth was also up eight per cent versus a degrowth of four per cent seen last year between May and July.

Of course, companies such as Hindustan Unilever and Colgate could feel the slowdown pinch on account of their size.

HUL in particular is expected to see the slowest growth of under 10 per cent both on the revenue and profit front in the second quarter (See chart). But with the tide expected to turn, happy days may not be far away for the FMCG giant.