Revamped distribution, portfolio may help Emami, TGBL, Jyothy, Bajaj stocks

Prior to the recent correction, fast moving consumer goods companies have been among the best-performing stocks on the back of a recovery in volume growth as well as expectations of an uptick in rural spending. However, within the FMCG pack, four companies–Emami, Tata Global Beverages, Jyothy Laboratories (Jyothy) and Bajaj Corp–have consistently been underperforming on the returns front.

While year-to-date returns for Emami, Tata Global Beverages and Bajaj Corp are in the negative, Jyothy Laboratories (Jyothy) has barely managed to push into the positive territory. Shareholders have lost 10-30 per cent in the first three stocks since January this year while Jyothy generated returns of 5 per cent. In comparison, the BSE FMCG Index was up 12 per cent while the Sensex gained over 10 per cent.

The lower returns profile is not without reason. While major companies in the FMCG sector have over the last two years clocked an average sales growth of over 6 per cent, the growth for the four underperformers is between 0.8-1.4 per cent. While demonetisation and the rollout of the goods and services tax (GST) affected incomes and threw the distribution network out of gear, analysts believe lack of innovation, pricing, presence in multiple products and geographies led to the poor show. 

The four players are, however, taking steps to reverse the cycle of lower sales growth. The companies are changing their distribution model for key products (Emami), restructuring their operations (Tata Global), strengthening wholesale distribution (Jyothy), and refreshing product portfolio (Bajaj Corp).

While these companies have reported robust numbers for the June 2018 quarter, analysts believe new products, higher advertising and promotions, as well as a revival in rural spending, will help them sustain the growth trend. 

Emami

Though Emami clocked a meagre 0.8 per cent CAGR in sales over FY16-18, lower than its peers, its like-to-like sales growth in FY18 was 5 per cent. The disappointment in recent quarters has largely been due to Kesh King.

“We are now focusing on retail channel and are increasing dependence on them. We are confident that growth in Kesh King would be upwards of 10 per cent,” said N H Bhansali, CEO-Finance Strategy & Business Development and CFO. Analysts believe that the new strategies are expected to help the company improve growth rates. Kaustubh Pawaskar of Sharekhan expects Emami's overall volume growth to come back with key brands such as Kesh King, Fair & Handsome and Boroplus likely to witness improvement. 

Tata Global Beverages (TGBL)

TGBL's performance was mainly weighed down by its international business, which contributes over half of its consolidated revenues. The company's two-year average sales growth is a muted 1.3 per cent. To improve overall growth, TGBL is restructuring its international division and also shutting down its non-profitable centres.  In addition to streamlining operations, the restructuring moves will help free up management bandwidth to focus on more profitable businesses while pruning consolidated losses and improving return ratios. Analysts expect the restructuring efforts to improve revenue and profit growth over the medium term.

Jyothy Laboratories

The muted 1 per cent sales CAGR in the last two years was mainly due to change in accounting practices, as per the management. Volume growth during the period was more than 6 per cent. “Demonetisation hit the entire wholesale, which accounts for 35 per cent of Jyothy's business, and this was followed by the implementation of the GST. Despite this, the market share of our key brands like Ujala improved,” said Ullas Kamath, Joint MD of Jyothy Laboratories.

However, the company is working on its wholesale network with an enhanced focus on direct communication. Jyothy plans to increase the number of direct wholesale points, from 80,000 currently to 100,000 in the near term. With a strong wholesale distribution, the top line is likely to grow in double digits with an expected 12-15 per cent volume growth in FY19. The company has also taken a 7 per cent price hike recently to protect its margin. There should not be major operating margin pressure at least till December 2018, Kamath added. However, due to floods in Kerala (the state which accounts for 15 per cent of Jyothy's business), volume growth in the September 2018 quarter could be impacted by 6-7 per cent.

Bajaj Corp

Bajaj Corp posted a satisfactory performance in Q1, though sales growth over the past two years has been a disappointing 1.4 per cent. Both its key segments, Almond Drops Hair Oil and Nomarks, posted 11.2 per cent and 3.8 per cent volume growth, respectively, in the quarter, albeit on a low base. The company has also revamped its distribution strategy to boost its Normarks segment, helping it improve its market share by 50 basis point year-on-year. The company’s managing director Sumit Malhotra believes that focus on direct distribution (0.54 million direct outlets) and reduced dependence on wholesale channel should improve sales growth. While hair oil growth is coming back, the relaunch of Nomarks should help revive growth in FY19.