FMCG volumes to remain weak in fourth quarter

HUL sees drop in rural demand; down-trading and higher demand for smaller pack sizes to hit margins

The hope rally seems to have given the consumer sector a complete miss. In the past month, the BSE FMCG Index has risen 1.14 per cent, while the Sensex is up 8.18 per cent. Investors are seeing more value in the beaten-down sectors, which would benefit from a revival in growth.

Although growth has dried up, valuations of fast-moving consumer goods (FMCG) stocks continue to be high, making investors uncomfortable. Even though freebies have been withdrawn by most of the players after the festive season, demand has significantly decelerated across categories and not just in the discretionary space.

Volume growth in the fourth quarter is expected to remain weak, claim consumer companies. In fact, the slowdown in demand has not “bottomed out” yet.

Hindustan Unilever reported a volume growth of four per cent in the third quarter of FY14 and the company has conveyed to analysts the fourth quarter would be no different. The management has conveyed to Nomura’s analysts that rural growth, strong up to the first quarter of FY14, has started seeing a slip after the quarter – which continues to be the case in the current quarter as well. Urban growth has remained weak and there is no sign of a turnaround.

Weak consumer sentiment has come with other consequences for companies. For starters, the lower price points and smaller pack sizes are in greater demand than the bigger ones. Be it biscuits or noodles, small pack sizes are flying off the shelves. This implies lower margins for FMCG companies. While companies have undertaken price hikes to offset input inflation, it is largely restricted to soaps and detergents. Antique Stock Broking expects Hindustan Unilever to undertake price hikes of six per cent in soaps and detergents to offset input-cost inflation during the March quarter.

With consumers trying to cut spending on discretionary items, the unorganised sector players are back in business, as they not only offer cheaper products but also offer higher margins. This is prevalent in chocolates and Cadbury has reported a decline in sales of Cadbury Silk. In the current environment, analysts are betting on ITC because of its pricing power in the cigarette segment.

Antique believes ITC is strongly placed in the current challenging environment, “backed by its addictive pricing power and domination in cigarettes. The company is increasingly working towards improving profitability in non-cigarette FMCG, through mix improvement and better efficiencies”.