Note Ban To Weigh On FMCG Firms’ Earnings In October-December

Demonetisation is expected to impact earnings of consumer companies in the quarter ended December 2016 as wholesale trade saw low movement amid lack of cash.

The wholesale channel contributes 30-50 percent of fast-moving consumer goods companies’ sales.

Brokerages say demonetisation did not have much of an impact on sales of staples, but discretionary items were hit. Cash crunch also hurt rural demand.

“The impact was more pronounced in small towns as... card and online payments are very low (there). Rural demand was impacted the most as banking density in rural areas is quite low compared to urban areas, although close-knit rural society and availability of goods on credit provided some relief,” Prabhudas Lilladher Pvt Ltd. said in its report on the sector.

Aggregate revenue of India’s eight largest FMCG companies by total income listed on stock exchanges is expected to decline by 1 percent while their net profit is likely to contract by 1.8 percent in the three months ended December 2016 compared to the year-ago quarter, according to Bloomberg consensus estimates.

The sector’s earnings before interest, taxes, depreciation and amortisation (EBITDA) is expected to fall 3 percent in the third quarter year-on-year.

“Demonetisation has dimmed predictability and we envisage sizeable divergence in actual and expected numbers in Q3FY17… Wholesale-dominated segments and rural areas were more impacted as they largely deal in cash,” Edelweiss Securities Ltd. said in its pre-earnings report on the sector.

Currency Purge Eats Into Volumes

Ambit Capital Pvt Ltd. expects volumes to decline by 8 percent year-on-year, and sees sales falling by seven percent in the October-December quarter.

Prabhudas Lilladhar, which also expects a decline in volumes, said, “Although companies have pricing power, given the price reduction of past two years, we expect only a muted price increase and a focus on boosting volume growth.”

Margins Under Pressure

FMCG companies’ margins are expected to be under pressure as sales took a hit during the quarter and raw material costs rose.

Lower advertising spends will help stem a contraction in margins. Companies had reduced advertising spends in the December-ended quarter as new launches were stalled due to demonetisation.

A pre-earnings report by Motilal Oswal Securities Ltd. expects EBITDA margins to contract by 110 basis points (a basis point is one hundredth of a percentage point).

Key Factors To Watch

1. Volume growth trends and demand in urban and rural geographies
2. Outlook for prices of raw material
3. Pricing action by consumer companies