Source: LiveMint.com, Jan 20, 2017
Mumbai: Sales of consumer packaged goods companies are expected to record their slowest growth in two years in the December quarter as customers cut back their spends even on essentials and groceries following the cash crunch after the scrapping of high-value banknotes on 8 November. Moreover, increasing raw material prices have put margins under pressure, and there was not much relief even as companies cut back on their advertising spends.
Demonetisation has hit consumption, a key growth driver of India’s economy across sectors from automobiles to telecom services and consumer. “We expect key consumption-driven sectors such as automobiles, telecom services and fast moving consumer goods (FMCG) to record the slowest growth in two years,” said Prasad Koparkar, senior director, Crisil Research, in a 10 January preview report.
As such the quarter began on a promising note for most businesses, aided by festive demand.
However, due to demonetisation, it is expected to be a washout quarter. Moreover, even hopes of rural recovery have crashed and rural sales are likely to lag behind urban despite good monsoons. “We forecast home and personal care volume-decline in mid-to-high single-digit range largely due to disruption in the wholesale channel, which accounts for 30-45% of revenue. Decline in value terms would be lower as price hikes have now kicked -in to counter raw material inflation,” said a 10 January report by analysts Richard Liu and Vicky Punjabi of JM Financial Institutional Securities Ltd.
The quarter saw prices across raw materials like palm oil, crude, milk, sugar and copra increase year-on-year. Companies were unable to completely pass on these price increases to the consumers given weak consumer spends. “Aggregate operating margin is likely to contract 120 basis points (bps) year-on-year, despite 30-40 bps cut in advertising and sales spends (as companies deferred their media spends and launches),” said analysts Rohit Chordia, Anand Shah and Abhas Gupta of Kotak Institutional Equities in a 3 January report. One basis point is a hundredth of a percentage point.
As such volumes of Hindustan Unilever Ltd, India’s largest consumer packaged goods company by sales, is expected to decline by 8-9%. The decline is expected to be sharper for GlaxoSmithKline Consumer Healthcare Ltd, the maker of Horlicks and Boost, at 12% over the year-ago quarter. However, Colgate-Palmolive (India) Ltd is expected to report a flattish topline (+0.7%) as 5% toothpaste volume decline would be largely offset by growth in pricing of 6%, said the JM Financial analysts.
Meanwhile, modern retail which accounts for 8% of India’s Rs2.6 trillion consumer packaged goods industry benefitted as consumers shifted to electronic and non-cash payment channels available at large stores due to cash crunch. “Before demonetisation, non-cash payments by debit and credit cards accounted for 60% of our overall revenues whereas cash was 40%. Post demonetisation, in the first couple of weeks, this changed to 90% digital payments and 10% cash and now it has settled at 80% non-cash payment and 20% cash,” said Govind Shrikhande, managing director, Shoppers Stop Ltd, which operates a department store chain by the same name and HyperCity, hyper markets retail chain. Sales for the retailer dropped by 30% following the announcement but has since recovered. In December, the retailer clocked sales growth in double-digits across formats, said Shrikhande.
However, even as modern retailers have managed to hold on to their sales, they may take a slight hit in sales as they may not entirely make up for the loss of sales in November.
However, sales for traditional trade retailers of consumer packaged goods companies were more optimistic at the end of December. “We are coming back to our regular sales. In
November, the sales were impacted but in December sales were back to normal levels,” said a distributor for Nestle India Ltd and ITC Ltd from Kolhapur, Maharashtra. He did not want to be named.
Companies we spoke to sounded more sanguine at end-December than they did in mid-November immediately post demonetisation announcement, said the JM Financial analysts, adding that the key to watch from the earnings season would be whether the quarter in fact turns out as bad as earlier envisaged.