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    Q1FY21 earnings preview: Consumer goods companies continue to see weak earnings, worsened by lockdown

    Q1FY21 earnings preview: Consumer goods companies continue to see weak earnings, worsened by lockdown

    Q1FY21 earnings preview: Consumer goods companies continue to see weak earnings, worsened by lockdown
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    By Ankit Gohel   IST (Published)

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    The consumer goods firms are expected to see a significant impact on earnings in the first quarter of fiscal 2021 due to the disruptions caused by the COVID-19 led lockdown on supply chain and manufacturing.

    The consumer goods firms are expected to see a significant impact on earnings in the first quarter of fiscal 2021 due to the disruptions caused by the COVID-19 led lockdown on supply chain and manufacturing. The consumer discretionary segments and categories vulnerable to social distancing have also seen persistently weak demand for a major part of the quarter.
    Near-normalcy was witnessed in the month of June in several staples categories with some of the discretionary demand also surprisingly bouncing back in the month.
    According to domestic brokerage house Motilal Oswal, the consumer sector is likely to see cumulative sales decline of 20.5 percent, EBITDA decline of 30.5 percent and net profit decline of 28.9 percent, YoY, in Q1FY21.
    The brokerage expects rural demand to be healthy in Q1FY21, and for the remainder of FY21 due to healthy Rabi crop cash flows, timely sowing of Rabi crop, good monsoons and sharp increase in MNREGA allocation.
    The raw material cost remained benign during the quarter which may aid the margins of FMCG companies. Additionally, sharp reduction in advertisement or travel spends may also support profitability limiting the impact of falling sales.
    Among companies, Hindustan Unilever is expected to report on-year sales decline of 1 percent with 1.5 percent volume growth in Q1FY21. The company’s EBITDA is likely to decline 10 percent YoY due to down-trading and impact on the high-margin discretionary sales of some premium personal product segments. Boosted by high other income and low corporate tax, HUL's  PAT is likely to decline by just 2 percent YoY, the brokerage said.
    ITC is estimated to report 35 percent decline in cigarette volumes with sales/EBITDA decline of 28 percent, YoY, each.
    Meanwhile, Tata Consumer’s reported numbers in Q1FY21 is likely to be unusually high due to the addition of Tata Chemicals’ consumer business. The like-to-like sales/EBITDA is likely to grow at 2 percent/5 percent, YoY.
    Operating performance of most companies during the quarter is expected to remain tepid, barring Britannia Industries, Nestle India and Godrej Consumer Products. Moreover, the brokerage expects double-digit EBITDA decline for Colgate-Palmolive, Dabur, Marico, Jyothy Labs, Asian Paints and EBITDA loss for United Breweries, United Sprits and Pidilite Industries.
    Motilal Oswal prefers Hindustan Unilever as its large-cap pick as it stands out like a beacon of light in terms of superior visibility on near and medium-term earnings, particularly in such volatile times. Also, valuations still offer scope for reasonable upside after factoring in the GSK Consumer Healthcare merger and synergies.
    The brokerage has upgraded Dabur to Buy as it offers best visibility beyond Q1FY21 due to successful efforts by the new CEO to boost growth, its high rural dependence, and large part of its portfolio being non-discretionary in nature.
    Marico remains the brokerage’s top-pick in the tier-II space as it has a more resilient portfolio than peers to withstand the COVID-19 led sales/earnings decline in FY21. Furthermore, the outlook on material costs is also better than the earlier expectation of possible inflation, it said.
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