FMCG firms continue to see demand slowdown

Better consumer sentiment not translating into sales

It would be an understatement to say consumer stocks are out of favour. With foreign investors continuing to churn their portfolio in favour of cyclicals, consumer stocks have been beaten down. The BSE FMCG Index has fallen five per cent since April 1, while the Sensex has risen 13 per cent. High valuations and weak growth have not helped the sector's outlook either. Listed FMCG stocks are trading at 25x its FY16 earnings.

Analysts according to whom the demand for FMCG products has further dropped in tier-II and tier-III towns, though the Consumer Confidence Index and Job Creation Index are trending upwards. Deutsche Bank Markets Research prefers FMCG companies that can potentially benefit from urban consumption recovery as it believes recovery will be led by urban markets. Packaged food is expected to lead the revival. However, Nestle has reported weak numbers in the March quarter (first quarter of CY14), with sales growing three per cent year-on-year and a decline in operating profit and net profit.

Antique Stock Broking feels an improvement in urban consumption would happen gradually over the next 12 months. The brokerage says: “Modern and lifestyle retailers, too, have not witnessed any indications of a demand improvement during the last two months, with footfalls yet to revive. Our interactions with paint manufacturers reveal the only outperformer has been decorative paints, which has continued to witness healthy demand."

Higher input prices have not helped either. Copra prices have risen 15 per cent sequentially in June and 130 per cent year-on-year. This might put pressure on Marico, which is expected to hike Parachute prices by three per cent on the back of steady pressure on profitability. Competitive intensity in select segments is also expected to hurt profitability. The oral care segment is one such category.

Companies are looking at new distribution channels and new product launches to beat the blues. ITC is expected to lead this trend with a spate of launches. It has already launched Sun Feast Farmlite oat biscuits and will bring out juices under the same brand name. The launches are not only in the FMCG category, the company is launching a cigarette with a four-stage charcoal based filtration under the Gold Flake brand. Other than this, ITC is also planning to take on Marlboro Lights with Classic Lights. Despite this, analysts believe demand is only expected to revive after 12 months.