Why you should watch out for FMCG stocks this quarter

The fast moving consumer goods (FMCG) sector is expected to perform in terms of topline while its bottomline might not be too impressive due to raw material cost pressures.

In fact, ICICI Direct says FMCG will be one of the best performing sectors as far as quarterly results are concerned. Among the consumer goods companies, the ones falling under the “discretionary spending” tag, like watches, jewellery and paint, will suffer in volume growth as well.

FMCG cos to perform well on a quarterly basis

Effective price increases and steady sales volumes will be the driving force for this sector. Sharekhan expects a topline growth of 15.1 percent for their coverage universe, while Emkay puts the number at 21 percent and IDFC says the growth would be 19 percent. But major raw materials have remained volatile through the quarter. The raw material prices have remained low compared to the last quarter, but on a year-on year basis they have remained higher.

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[caption id=“attachment_104430” align=“alignleft” width=“380” caption=“ICICI Direct says FMCG will be one of the best performing sectors as far as quarterly results are concerned. Reuters”]  [/caption]

The price of palm oil, which is important for Hindustan Unilever (HUL), Godrej Consumer (GCPL) and Zydus Wellness (Zydus), is up 15 percent y-o-y. The price of copra, a crucial input for Marico was higher by over 50 percent year-on-year. Other inputs like LLP and HDPE were up 33 percent and 11 percent respectively, on a year-on-year basis. But compared to last quarter, raw material prices have cooled off, though not very significantly. If this trend continues, one could see substantial improvement in profitability in the next quarter.

Since raw material prices continue to remain under pressure and most companies are not confident of increasing prices without affecting the volumes, the advertisement costs will remain muted for most. Marico, infact in a historic move last month had briefed its investors about how maintaining profitability was getting increasingly difficult and analysts might be overestimating its profitability.

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Price rise to hit paint companies

Paint companies like Asian Paints and Berger along with jewellery and watch company Titan will suffer due to less discretionary spending. The paint industry will actually feel the heat of low growth in real estate and automobile sectors. ICICI Direct says that Asian Paints will see a flat volume growth though its revenue will see double-digit growth mainly due to price rise.

Companies cannot remain insulated from rupee depreciation

The other factor that is ambiguous but could have its notable effect on this quarter results is the depreciation of the rupee. Companies get raw materials from abroad, export the final products, have joint ventures with international companies and take foreign currency loans, all of which means they cannot remain insulated from the rupee depreciation.

Exports act as a hedge against the raw materials they import.

GCPL has foreign currency loans of $350 million, while Dabur has this number at $169 million and Marico at $117 million. JM Financial had written in a September report that GCPL will have to pay $50-70 million by March next year. It must have hedged a part of it, but its net worth could suffer due to translation losses. Marico and Dabur will perhaps gain as they sell 25 percent of their products abroad which acts as a hedge against the raw materials they import.

HUL could book mark-to-market losses

HUL could be the worst affected as most of their raw materials are linked to international prices while it hardly sells anything abroad. So some companies could perhaps book some mark to market losses (booked to show the real value of assets). But Sharekhan says no company will book any such losses because of adequate hedging that most of them provide for.

However, FMCG company valuations are not cheap anymore. The Marico incident was the biggest example that there is little room for any negative surprise that a disappointing result of a company could throw at investors. So beware managements, the Street is watching you closely!