Prospects brighten for FMCG in Q4

Consumer goods sales may rise as note ban effect wears off and Budget gives boost to rural India

The third quarter (Q3) of the current financial year could be the last of the worst for consumer firms as the demonetisation effect slowly wears off and the just-announced Budget gives a push to the rural economy. 

Fast-moving consumer goods (FMCG) firms had already indicated, while announcing their Q3 numbers, that the sales situation after currency ban had improved in the past few months. “January was better than December and December was better than November,” Sanjiv Mehta, managing director (MD) & chief executive officer, Hindustan Unilever, had said, while announcing the company’s results.

Godrej Group Chairman Adi Godrej said, “The demonetisation effect is tapering fast and the remonetisation effort is gaining steam. Add to this the general Budget with its thrust on rural development, agriculture, housing, electrification and infrastructure bodes well for people, including those in the villages. Consumption will get a boost.”

Analysts expect the fourth quarter numbers of consumer goods companies will not show much of an impact of demonetisation on sales. The picture on the topline front, the worst in Q3 in four quarters, will get better in the next financial year, they say.

The only challenge, however, will be managing rising input costs, expected to put pressure on margins, said an analyst.

Equinomics Research & Advisory founder G Chokkalingam said, “A year ago, we were staring at a deflationary environment as commodity prices, including the price of crude oil, collapsed to around $20 a barrel. The situation has now reversed as the price of the commodity has inched up to the $57 mark. It could touch $60 a barrel in the near term.” 

It was this deflationary environment that aided profit growth for FMCG companies in the quarters ending March, June, and September 2016, widening the gap in sales growth, muted on account of a slowdown. The December 2016 quarter interestingly saw this gap, which varied between 630 and 1,180 basis points (bps) in the previous three quarters, shrink to 220 bps. This came as demonetisation kept sales growth down and rising input costs ensured that profit growth was slow.

Analysts such as Amar Ambani, head of research, IIFL Wealth & Asset Management, believe that implementation of the Goods & Service Tax could result in a temporary disruption of sales (for consumer firms) as trade would grapple with the new regime. 

But others remain hopeful. KRChoksey Investment Managers MD Deven Choksey said, “The next two years promise to be bright. Income levels are improving and so are consumption levels. With the just-announced Budget attempting to address the distress in rural areas, there is a case here for overall FMCG consumption to move up.”

Marico Chairman Harsh Mariwala said, “The allocation of resources to rural, agriculture and infrastructure sectors in the Budget is a positive. Consumer goods companies would get a boost.”

A third of FMCG sales in India come from rural areas with companies such as Dabur and HUL seeing at least 40 per cent of their sales coming from there. Any effort, therefore, say experts, to lift this segment will increase sales prospects for consumer firms in the future.   

Britannia Industries MD Varun Berry said, “We have not seen a sustained uptick in demand for a long time. With a significant thrust in the Budget on rural and agricultural sector, we could well see a turnaround in rural demand and, hence, a fillip to consumption.”