Consumer goods companies’ profit and revenue growth is expected to slow down as the impact of demonetisation still persists and bulk dealers may cut stock till the Goods and Services Tax (GST) is implemented.
Volume growth will remain under stress due to weak rural demand which may revive only if the monsoon is good, said Kaustubh Pawaskar, senior research analyst at brokerage house Sharekhan. Implementation of GST will also have a short-term impact in the first half of the ongoing financial year, he said.
Multiple analysts lowered the 2017-18 earnings forecast for all major fast-moving consumer goods (FMCG) firms, including market leader Hindustan Unilever Ltd. and its peers like ITC Ltd., Marico Ltd. and Britannia Industries Ltd.
Prime Minister Narendra Modi’s decision to invalidate old high-value notes in November last year had triggered a cash crunch, hurting consumption. The wholesale distribution channel, which contributes up to half of the revenue of FMCG firms, had suffered the most and continues to remain under pressure.
The new indirect tax regime is also expected to impact inventory as most stockists will choose to destock as the prices will change after GST is rolled out, said Sachin Bobade, senior analyst at research firm Dolat Capital. Since the FMCG sector relies heavily on channels for distribution, it will hurt revenues in the first half of the year.
“Post demonetisation, analysts have become even more skeptical as they expect the impact to continue into the first few months of FY18. The sector is now also exposed to heightened competition from players like Patanjali and introduction of GST is the other factor which will hurt earnings in the short term,” said Amar Ambani, head of research at brokerage IIFL.
Higher commodity costs are adding pressure but consumer goods companies may not be able to increase prices amid rising competition and advertising expenses,
Will Stocks Be Downgraded?
Analysts are divided if FMCG stocks will be downgraded.
Since FMCG is mostly a defensive sector, too much money won’t be chasing the consumer stocks any time soon. Ambani expects analysts to go from ‘buy’ to ‘hold’, but not ‘sell'.
Ajay Thakur, lead analyst at brokerage Anand Rathi, does not expect too many rating downgrades and only a stock-wise valuation downgrade.
FMCG stocks are trading at their peak valuations. There is a possibility of a rating revision depending on the management commentary after the quarterly earnings, said Pawaskar.