In a year when the earnings of the benchmark indices are expected to deliver single-digit growth, a sector that is going to grow revenues by 16 per cent year-on-year (YoY) and net profit by 19 per cent should be a darling of investors. Despite all the noise around cyclicals, the fast-moving consumer goods (FMCG) sector is expected to steal the show this quarter, too. Analysts expect revenues and profits to grow at a steady clip on the back of strong demand and price increases.
FMCG is possibly the only sector that is likely to expand margins in the second quarter, even though advertising and promotional (A&P) spends are expected to have gone up. Benign input prices and calibrated price increases will help margin expansion last quarter. For the sector, Brics Securities expects a 140 basis points YoY rise in A&P expenses, led by 450, 250 and 160 basis points increase in the spends of Dabur, Marico and Godrej Consumer, respectively.
In a bid to protect volume growth and keep it in high single or double digits, most companies have increased promotional spends. Marico and Colgate are expected to record the maximum expansion of operating margins, claim analysts. Religare Institutional Research expects operating margin for its FMCG universe to increase by 50 basis points YoY, which is muted compared to the previous quarter (up 150 basis points YoY), given that the intensity of price hikes has reduced on account of stable input prices and lower A&P spends.
Though monsoons mostly played truant in the first two months of the year, analysts expect top line and earnings before interest, taxes, depreciation and amortisation (Ebitda) growth of FMCG companies to remain strong. Large-caps such as Hindustan Unilever Ltd (HUL) and ITC are likely to report steady YoY top line growth of 15/14 per cent, says Religare. Despite all the good news, the upside in these stocks is limited as stock prices have run up significantly over the last few months. HUL and ITC remain preferred picks of most brokerages in the large-cap space, while Emami and Dabur are preferred picks in the mid-cap space.
