Volume-led growth of FMCG companies continue to rise on key input costs

The December 2018 quarter (Q3) performance, which will highlight near-term prospects and valuations, will help gauge how the sector will do in 2019 for investors, say analysts.

The fast-moving consumer goods (FMCG) sector was one of the best performing ones in 2018 (CY18), gaining 10.6 per cent. Steady volume and revenue growth, led by higher demand and a positive impact of the goods and services tax (GST), kept it on the top of investors’ “buy” lists even as other sectors reported muted financial performances.
 
The December 2018 quarter (Q3) performance, which will highlight near-term prospects and valuations, will help gauge how the sector will do in 2019 for investors, said analysts.
 
Big festivals — Dussehra and Diwali — in the September quarter of 2017-18, shifted to the third quarter this financial year (2018-19 or FY19). This is expected to have fuelled volume growth of many consumer companies. Besides, recovery in canteen stores department (CSD) channel sales accounting for around 5-7 per cent of the sector’s sales is likely to have supported overall volume growth.
 

Consumer discretionary companies (paints, Titan, among others) have benefitted more from the shift in the festive season than consumer staple companies. For instance, Asian Paints and Berger Paints are estimated to have clocked up to 12 per cent year-on-year volume growth in Q3FY19. Consumer staples are expected to post 6-10 per cent volume growth despite a higher base in the year-ago quarter.

As in the previous quarters, rural growth is expected to have outpaced urban growth. According to JM Financial’s Q3 preview report, management commentaries suggest that contrary to expectations, rural performance versus urban (growing 1.2-1.3 times) has not widened further than levels seen in recent quarters.
 
Also, many companies have hiked prices during Q3FY19. For example, paint companies took 1.6 per cent average price hikes after around 2 per cent price hikes in October. Dabur increased prices by an average of 1-2 per cent. This, along with good volume traction, is expected to have boosted overall revenue growth.
 
Major consumer players are expected to report 10-15 per cent year-on-year rise in their top line (see chart). While the top lines of Colgate Palmolive, Godrej Consumer Products and ITC are estimated to have risen relatively slower by 8-9 per cent, Titan would lead the pack with a 26 per cent increase.
 

Though input-cost inflation is benign, with correction in key inputs such as crude oil and palm oil among others, they were high in a year-on-year basis in Q3. Thus, there would be some hit on gross profit margins of the companies.
 
However, cost-saving measures by some companies would protect their earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to some extent. Benefits of price hikes and softening raw material prices are expected to flow from the March 2019 quarter, say analysts.
 
Overall, companies would report volume-led earnings growth in Q3. From Q4 onwards, earnings should also get a boost from an expected improvement in profitability due to receding input-cost pressures. Rich valuations, however, could spoil the show.
 
“Healthy consumer demand and softening raw material cost pressure would keep the fundamentals of the FMCG companies intact in the near term. However, pricey valuation could limit the stocks’ upside,” said Vishal Gutka, assistant vice-president at Philip Capital.
 
Hindustan Unilever, Marico, Asian Paints and Nestlé are the top picks of analysts among the FMCG space.