Sustained volume weakness, downward margin pressures due to soaring input cost, high advertisement costs and moderation in rural spends are taking a heavy toll on the FMCG sector
Weak trend to persist
Weak consumer dem*and, sustained volume weakness, downward margin pressures due to soaring input cost, higher advertisement expenditure and continued moderation in rural spends are taking a heavy toll on FMCG sector performance in spite of strong revenue growth. The trend is likely to continue for at least two quarters now, according to analysts and industry experts.
Most FMCG companies have experienced slow volume growth due to continuous challenges in spends on premium items and high competition across segments. Hindustan Unilever (HUL), ITC, Nestle, Godrej Consumer have all reported slower-than-expected volume growth in the last quarter.
Kaustubh Pawaskar, a research analyst at Sharekhan, said, "We expect moderation in FMCG growth for at least the next two quarters. We do not foresee any improvement in performance in the near future. Consumer demand has in fact deteriorated sequentially, with disproportionate impact on discretionary, premium personal care and food categories."
“The El Nino impact, monsoon and election uncertainty could further dampen the growth prospects of FMCG sector,” added Pawaskar.
Traditionally, the FMCG sector is considered to be a defensive sector, which means the stocks are in high demand in a weak market. But, there has been a volatility in the FMCG stock over the last two quarters.
P Ganesh, executive vice president, finance and commercial and company secretary of Godrej Consumer Products told Financial Chronicle the slowdown issue persists in the FMCG sector. “Overall industry sales are slow on the back of higher prices and low sentiment. In case delays in government decision-making as well as lull in the market continue, it could impact retail and FMCG sector,” said Ganesh.
Ullas Kamath, joint managing director of Jyothy Laboratories, told Financial Chronicle that the offtake in discretionary items continues to be low. “In urban India, the moderation in volume growth will continue. With a new government coming in, the situation is likely to improve. Though we are ahead of the industry, we are seeing low volume growth of around 12 per cent for the past five quarters. We expect 13-14 per cent Ebitda margin growth and 20-25 per cent topline growth during the next financial year,” said Kamath.
As raw material prices soar, some FMCG firms are revisiting their sourcing programmes to identify cheaper raw materials to increase efficiency and reduce cost of operations. Firms have also started looking at innovative and more affordable ways of packaging.
Analysts say FMCG firms are also trying to reduce their stock-keeping units and working on reducing logistic costs as they try to keep a control on inventory levels to ensure better supply chain management.
According to Gautam Duggad, vice-president (research) at Motilal Oswal Financial Services, growth for the consumer sector moderated during the December quarter (third quarter of FY14) both in terms of value and volume, driven by deteriorating demand. "The Hindustan Unilever (HUL) management indicated that fourth quarter of FY14 could be weaker than the third quarter. The moderation is across categories and geographies, with discretionary categories facing disproportionate impact," Duggad said.
HUL posted 4 per cent volume growth for the quarter ended December 2013, lower than 5 per cent growth in the preceding quarter.
“The beneficial effect of a good monsoon has not been felt, reflecting the non-relevance of monsoon swings. While HUL has not seen any downtrading, it is witnessing slowdown in the pace of premiumisation,” added Duggad.
The fourth quarter will face tough comparisons due to a 100 basis points positive impact of pipeline filling ahead of the transporters’ strike in the base quarter, Duggad added. While pricing has improved in soaps due to raw material inflation, in beverages, pricing will fade further due to the anniversary effect, he said.
“We expect FMCG companies under our coverage to report an aggregate revenue growth of 11.8 per cent in Q4FY14 (vs 10.9 per cent in Q3FY14). We expect revenue for the foods companies to grow at 10.1 per cent and that for personal care companies to hover at 10.6 per cent,” according to recent research report by ICICI Securities.
“While personal care companies should see marginal dip in gross margin and flat Ebitda margin, we expect food companies to report expansion in both the parameters. Our interactions with FMCG distribution ecosystem and business heads suggest that overall FMCG sales will maintain 9-11 per cent growth for the coming 12 months, and no significant sign of revival is visible,” the ICICI Sec report added.
Edelweiss group’s associate director, institutional equities research, Abneesh Roy, said, “We remain cautious on the consumer goods sector and recommend a selective approach. Rural demand has lost pace despite a good monsoon, reflecting impact of weak sentiments on a high base, lower wage hike than general inflation and likely dip in remittances from urban migratory workers. With an additional headwind of El Nino, consumer companies need to be even more proactive in rural India.”
“On the other hand, likelihood of a strong or stable government post elections is expected to revive urban growth (low base of past few years should help). Currently, volume growth is a challenge for most companies, though Dabur, Pidilite, Colgate, Asian Paints, Godrej Consumer and GSK Consumer are doing better. Growth has been a stiff challenge in hair oils, skincare, discretionary foods and liquor,” added Roy.
Consumer companies' rural demand too, which had been outpacing urban growth, has seen significant moderation in spite of good monsoon weighed down by macro slowdown.
A latest report by IDFC Institutional Research, says, “The FMCG industry continues to witness demand challenges; industry growth has further slowed in Q4 across categories, channels and markets. The secular trend of premiumisation has slowed down over the last two quarters with growth rates healthier at the lower end of the pricing spectrum. Companies have taken up pricing in the quarter; we expect price-driven growth to play a larger role in the overall revenue mix in the quarter. The higher pricing and no major elevation in competitive intensity will keep profitability intact, with margins expected to expand across most players.”
“We expect our FMCG coverage universe to post a 12 per cent revenue growth, 17 per cent Ebitda growth and 14.5 per cent PAT growth for the quarter. We expect Godrej Consumer and Jyothy Laboratories to lead the pack with double-digit volume growth. HUL will witness continued weakness all round. For ITC, apart from continued margin expansion in cigarettes, the quarter will also be driven by strong Ebit growth in FMCG, hotels and agri, led by a low base,” says the IDFC report.
Consumer companies are fighting slowdown by launching new products: ITC launched a premium offering in biscuits, Sunfeast Farmlite; Emami extended Fair and Handsome brand to face wash; P&G launched a shampoo for males - Head & Shoulders Men Cool Blast, GCPL launched Good Knight Xpress, a more powerful liquid vaporiser. Competition was high in detergents and oral care space. Rising raw material prices have prompted companies to take price hikes (sharp increase in LLP and copra prices prompting hair oil companies like Marico, Bajaj Corp and Dabur to consider price hikes; GCPL and HUL have reversed promotions on soaps due to rising palm oil prices). Ad spends could trend lower in some categories.
“Companies will continue to focus on innovation to counter the slowdown. Upcoming election is a key event to watch out for as a strong government at the centre will help revive urban demand. Inflation and El Nino pose a key risk to demand revival,” said Roy of Edelweiss.
This article taken from mydigitalfc : http://www.mydigitalfc.com/sectoral-watch/weak-trend-persist-968
Weak trend to persist
Weak consumer dem*and, sustained volume weakness, downward margin pressures due to soaring input cost, higher advertisement expenditure and continued moderation in rural spends are taking a heavy toll on FMCG sector performance in spite of strong revenue growth. The trend is likely to continue for at least two quarters now, according to analysts and industry experts.
Most FMCG companies have experienced slow volume growth due to continuous challenges in spends on premium items and high competition across segments. Hindustan Unilever (HUL), ITC, Nestle, Godrej Consumer have all reported slower-than-expected volume growth in the last quarter.
Kaustubh Pawaskar, a research analyst at Sharekhan, said, "We expect moderation in FMCG growth for at least the next two quarters. We do not foresee any improvement in performance in the near future. Consumer demand has in fact deteriorated sequentially, with disproportionate impact on discretionary, premium personal care and food categories."
“The El Nino impact, monsoon and election uncertainty could further dampen the growth prospects of FMCG sector,” added Pawaskar.
Traditionally, the FMCG sector is considered to be a defensive sector, which means the stocks are in high demand in a weak market. But, there has been a volatility in the FMCG stock over the last two quarters.
P Ganesh, executive vice president, finance and commercial and company secretary of Godrej Consumer Products told Financial Chronicle the slowdown issue persists in the FMCG sector. “Overall industry sales are slow on the back of higher prices and low sentiment. In case delays in government decision-making as well as lull in the market continue, it could impact retail and FMCG sector,” said Ganesh.
Ullas Kamath, joint managing director of Jyothy Laboratories, told Financial Chronicle that the offtake in discretionary items continues to be low. “In urban India, the moderation in volume growth will continue. With a new government coming in, the situation is likely to improve. Though we are ahead of the industry, we are seeing low volume growth of around 12 per cent for the past five quarters. We expect 13-14 per cent Ebitda margin growth and 20-25 per cent topline growth during the next financial year,” said Kamath.
As raw material prices soar, some FMCG firms are revisiting their sourcing programmes to identify cheaper raw materials to increase efficiency and reduce cost of operations. Firms have also started looking at innovative and more affordable ways of packaging.
Analysts say FMCG firms are also trying to reduce their stock-keeping units and working on reducing logistic costs as they try to keep a control on inventory levels to ensure better supply chain management.
According to Gautam Duggad, vice-president (research) at Motilal Oswal Financial Services, growth for the consumer sector moderated during the December quarter (third quarter of FY14) both in terms of value and volume, driven by deteriorating demand. "The Hindustan Unilever (HUL) management indicated that fourth quarter of FY14 could be weaker than the third quarter. The moderation is across categories and geographies, with discretionary categories facing disproportionate impact," Duggad said.
HUL posted 4 per cent volume growth for the quarter ended December 2013, lower than 5 per cent growth in the preceding quarter.
“The beneficial effect of a good monsoon has not been felt, reflecting the non-relevance of monsoon swings. While HUL has not seen any downtrading, it is witnessing slowdown in the pace of premiumisation,” added Duggad.
The fourth quarter will face tough comparisons due to a 100 basis points positive impact of pipeline filling ahead of the transporters’ strike in the base quarter, Duggad added. While pricing has improved in soaps due to raw material inflation, in beverages, pricing will fade further due to the anniversary effect, he said.
“We expect FMCG companies under our coverage to report an aggregate revenue growth of 11.8 per cent in Q4FY14 (vs 10.9 per cent in Q3FY14). We expect revenue for the foods companies to grow at 10.1 per cent and that for personal care companies to hover at 10.6 per cent,” according to recent research report by ICICI Securities.
“While personal care companies should see marginal dip in gross margin and flat Ebitda margin, we expect food companies to report expansion in both the parameters. Our interactions with FMCG distribution ecosystem and business heads suggest that overall FMCG sales will maintain 9-11 per cent growth for the coming 12 months, and no significant sign of revival is visible,” the ICICI Sec report added.
Edelweiss group’s associate director, institutional equities research, Abneesh Roy, said, “We remain cautious on the consumer goods sector and recommend a selective approach. Rural demand has lost pace despite a good monsoon, reflecting impact of weak sentiments on a high base, lower wage hike than general inflation and likely dip in remittances from urban migratory workers. With an additional headwind of El Nino, consumer companies need to be even more proactive in rural India.”
“On the other hand, likelihood of a strong or stable government post elections is expected to revive urban growth (low base of past few years should help). Currently, volume growth is a challenge for most companies, though Dabur, Pidilite, Colgate, Asian Paints, Godrej Consumer and GSK Consumer are doing better. Growth has been a stiff challenge in hair oils, skincare, discretionary foods and liquor,” added Roy.
Consumer companies' rural demand too, which had been outpacing urban growth, has seen significant moderation in spite of good monsoon weighed down by macro slowdown.
A latest report by IDFC Institutional Research, says, “The FMCG industry continues to witness demand challenges; industry growth has further slowed in Q4 across categories, channels and markets. The secular trend of premiumisation has slowed down over the last two quarters with growth rates healthier at the lower end of the pricing spectrum. Companies have taken up pricing in the quarter; we expect price-driven growth to play a larger role in the overall revenue mix in the quarter. The higher pricing and no major elevation in competitive intensity will keep profitability intact, with margins expected to expand across most players.”
“We expect our FMCG coverage universe to post a 12 per cent revenue growth, 17 per cent Ebitda growth and 14.5 per cent PAT growth for the quarter. We expect Godrej Consumer and Jyothy Laboratories to lead the pack with double-digit volume growth. HUL will witness continued weakness all round. For ITC, apart from continued margin expansion in cigarettes, the quarter will also be driven by strong Ebit growth in FMCG, hotels and agri, led by a low base,” says the IDFC report.
Consumer companies are fighting slowdown by launching new products: ITC launched a premium offering in biscuits, Sunfeast Farmlite; Emami extended Fair and Handsome brand to face wash; P&G launched a shampoo for males - Head & Shoulders Men Cool Blast, GCPL launched Good Knight Xpress, a more powerful liquid vaporiser. Competition was high in detergents and oral care space. Rising raw material prices have prompted companies to take price hikes (sharp increase in LLP and copra prices prompting hair oil companies like Marico, Bajaj Corp and Dabur to consider price hikes; GCPL and HUL have reversed promotions on soaps due to rising palm oil prices). Ad spends could trend lower in some categories.
“Companies will continue to focus on innovation to counter the slowdown. Upcoming election is a key event to watch out for as a strong government at the centre will help revive urban demand. Inflation and El Nino pose a key risk to demand revival,” said Roy of Edelweiss.
This article taken from mydigitalfc : http://www.mydigitalfc.com/sectoral-watch/weak-trend-persist-968