Q4: Rural demand to help Consumer Goods sector post a volume-led growth

The Consumer Goods (CG) sector is likely to witness better results on the back of volumes that will drive the business in the fourth quarter ended March 31, 2 016, Edelweiss Securities in a report dated April 7 said. 

The consumer goods universe is slated to record year-on-year (YoY) revenue and earnings before interest, taxes and amortisation (EBITDA) growth of 5.3% and 10.7%, respectively, the report said adding that the estimated profit after tax (PAT) of the sector to be at 9.3%. However, Finance Minister Arun Jaitley had hiked the excise duty from 10% to 15% in the Union Budget 2016-17 and it is estimated to have an impact on the fourth quarter (Q4) earnings of consumer goods companies. Edelweiss Securities said, "Phasing out of excise benefit will impact the growth of Hindustan Unilever (HUL), Pidilite, GSK Consumer, Britannia, and Colgate."  

The Jat agitation of Haryana had hampered production of consumer goods companies in parts of North India but it is unlikely to have a significant impact on their sales in the fourth quarter (Q4). "Though production was hampered for a few days in parts of North India due to the Jat agitation, it is unlikely to impact sales significantly," said Edelweiss Securities.  

With inflation firmly under control--around 5%-- raw material prices for the CG sector continue to remain comfortable helping them expand on their gross margins. "Gross margin expansion will sustain year-on-year (YoY), benefits of which will partly be ploughed back into ad and promotions," cited the research firm. The revenue spends on advertising and promotions is stated to be higher for most companies mainly due to cut-throat competition from new players. "Advertising and promotions to remain high for most companies due to stiff competition, especially from players like Patanjali, Sri Sri Ayurveda, etc.," it said. 

As far as the recovery in the urban areas in the second-half of the fiscal year 2016-17 (FY17) is concerned, the research firm remains positive due to several initiatives taken by the new government. "We remain positive on urban recovery in H2FY17 led by the 7th Pay Commission, interest rate cuts and One Rank One Pension (OROP) implementation," noted the research firm. 

Rural growth is likely to revive with a lag as monsoon forecasts predict good rainfall in FY17.  

It noted the budget's Rs 900 billion allocations to rural development and proposal for 100% rural electrification bode well for rural demand 

The sales growth of most fast moving consumer goods companies are likely to be volume led for their Q4 earnings due to various reasons such as Jat agitation, increase in excise duty, advertising and promotion spends, etc., 

The future

On the future outlook for the consumer goods sector, the demand recovery is projected on slow pace for urban areas whereas for rural areas it will depend on good monsoon.

"We expect demand recovery in urban areas to be gradual and to benefit led by 7th Pay Commission, interest rate cuts and implementation of  One Rank One Pension (OROP). Rural recovery hinges on good monsoon," Edelweiss Securities said. 

According to the research firm, top consumer goods companies that investors should look out for during the fourth quarter (Q4) are Britannia, Asian Paints, Godrej Consumer, Marico, Emami and United Spirits.