The fast-moving consumer goods (FMCG) companies are likely to witness a subdued earnings growth in the third quarter of fiscal 2020, brokerages said.
Volume growth is expected to remain tepid while EBITDA growth would be driven by margin expansion on the back of benign raw material prices.
However, bottomline growth will have significant benefit from recent corporate tax cuts.
The Nifty FMCG index also has underperformed the benchmark indices falling 2.2 percent during the quarter.
“The slower recovery in the economy, weak consumer sentiment, liquidity issues faced by channel partners and unseasonal rains damaging crops in some parts of the country, could show up in weak revenues,” Centrum Institutional Research said.
Analysts expect the impact of weak rural growth would be felt the most by Hindustan Unilever and Marico, as rural sales contribute a sizeable portion of their overall sales.
For the FMCG companies, JM Financial expects sales, EBITDA and adjusted net profit in Q3FY20 to grow by 8.6 percent, 12 percent, and 23 percent respectively.
In Q3FY20, the brokerage expects benign raw material costs to boost home and personal care (HPC) operating margin by 87 bps and drive EBITDA growth of 9 percent. Discretionary Group’s revenue growth is expected to improve to 8.8 percent versus 7 percent in the September quarter.
“The trend is not too different when compared to the September quarter but much lower versus earlier levels. Deceleration has been stark for HPC and food segments where we are expecting 4.5 percent growth,” JM Financial said.
Notably, raw material costs have started showing initial signs of inflation but the adverse impact of the same would reflect only on ensuing quarters largely led by inflation in crude oil prices.
Meanwhile, worries over consumption slowdown have been flagged by major FMCG companies, ITC being the most recent.
“The economic slowdown is fairly widespread in the country, and although the government has adopted a slew of reform measures, the effects will be visible only after some time in a large country like India, said
Sanjiv Puri, Chairman and Managing Director of ITC Ltd, who added that although the company has been growing, growth rates are lower than last year.
In Q3FY20, ITC is expected to see 6.2 percent YoY rise in sales with 2 percent cigarette volume growth. Net profit may rise 29.6 percent while EBITDA may grow 9 percent, YoY, according to JM Financial.
Marico is likely to post muted revenue growth of 2.5 percent YoY due to a weak domestic business environment. Volume growth is expected to be at 4 percent on the back of double-digit growth in Saffola and Foods segment. Parachute and VAHO segments are expected to report flattish volume growth during the quarter, ICICI Direct Research said.
“Due to a decline in copra prices of around 5 percent YoY, we expect 61 bps expansion in operating margins to 19.4 percent. Net profit is expected to increase by 5.6 percent YoY to Rs 265.7 crore,” it said.
Britannia Industries’ revenue is expected to grow 7.7 percent on year with volume growth of 5 percent. Net profit may rise by 20.8 percent. EBITDA is likely to grow by 9.8 percent while EBITDA margin may expand by 30 bps, YoY.
HUL is expected to witness 6.5 percent YoY sales growth mainly driven by 4 percent volume growth in addition to product mix improvement of 2 percent. “We believe muted sales growth would be due to weak growth in personal care segment (around 50 percent of sales), impacted by intensified competition in the soap category. Home care, and foods and refreshment segment should witness better sales growth owing to premiumisation trend,” ICICI Direct Research said.
HUL is expected to witness a slight operating margin decline of 42 bps to 21 percent due to upsurge in palm oil prices while profit to grow 4 percent YoY to Rs 1502.4 crore.
Dabur may post 5.8 percent YoY revenue growth led by 6 percent volume growth. International operations are expected to witness 5.1 percent YoY sales growth on account of a revival in Turkey, MENA and Nepal regions.
EBITDA margins may increase by 49 bps to 20.8 percent driven by tight control over operational costs. PAT is expected to increase by 10.3 percent to Rs 405 crore on the back of higher operating profit.Brokerages expect FMCG companies’ efforts to increase rural penetration and focus on new launches amidst tough economic environment would reap rich dividends in the forthcoming quarters.