FMCG Q1 Earnings Preview: Another washout likely as consumer sentiment remains weak

Q1FY20 is likely to be another washout quarter for the fast-moving consumer goods (FMCG) sector owing to weak consumer sentiment further impacted by the general elections and continued weakness in rural India.

The pace of growth in rural India has moderated from 1.7-1.8X urban growth some quarters ago to same as urban growth currently. Barring some margin expansion owing to lower crude prices, not much is expected to change in Q1FY20 from Q4FY19. In fact, majority of the street believes even Q2FY20 is likely to be a quarter of low growth.

Most companies in Q1 are expected to report volume growth in mid-single digits. Cookie major Britannia & Hair Oil to health food major Marico are likely to outperform with 6-6.5 percent growth, while Fevicol maker Pidilite may disappoint for another quarter in a row due to unavailability of carpenters during general elections. In segments such as detergents, there have been some price hikes which will mitigate a deep dent in revenue due to lower volume growth.

Management commentaries ahead of quarterly result from Godrej Consumer, Marico and even Titan have been circumspect.

From an investors’ standpoint, most FMCG stocks have cooled from record-high valuations. However, at an average of 41X FY21e PE, they’re still far from comforting. All hopes are now pinned on H2FY20 where monsoons, festive season and government hand-outs may spur some demand for consumer staples and discretionary products.