BQ Survey | Third Quarter May Be Even Worse For FMCG Companies

The distributors—who according to Nielsen India contribute 90 percent to the factory-gate sales of the Rs 4-lakh-crore fast-moving consumer goods industry—stocked upto 40 percent fewer products over a year earlier, they said on the condition of anonymity out of business concerns. That helped them destock - inventory days fell from 45 a couple of quarters ago to seven-10 days now, according to the survey.

While that’s expected to weigh on the sales of consumer goods makers, the bulk dealers of biscuits to shampoos said even the companies didn’t force them to stock more than required as they were still grappling with a cash crunch.

Marico Ltd.’s third-quarter update corroborated the trend.

Ahead of its earnings the maker of Parachute coconut hair oil, in a note to investors, said demand from the traditional channel remained weak as distributors continued to face liquidity challenges amid a soft demand environment. “The India business as a whole posted a marginal decline in volume growth,” it said.

While category growth across personal care remained under pressure, foods and allied segments fared relatively better, Marico said.

Brokerage Motilal Oswal, in its pre-earnings note, said after eight quarters of continued outperformance, the second quarter (Jul-Sept) in the ongoing fiscal witnessed rural growth slipping below urban, and the trend is likely to continue in the third quarter as well. “Impact of floods persisted in the early part of the third quarter with liquidity concerns and weak rural demand.”

Domestic demand for FMCG companies has slowed in the last one year as wages stagnated and rural incomes fell, dragging the nation’s GDP growth to its lowest in over a decade. Slowing consumption, mounting inventories and a general credit crunch across business forced some 5,000 suppliers out of business since April, BloombergQuint had reported earlier. Prompting many companies to push fewer goods across the supply chain as well as accept delayed payments from distributors.

Here are the key findings from BloombergQuint’s conversation with the distributors…

• A distributor in West Bengal reduced buying of goods by 40 percent over last year as demand from retailers remains weak.
• Distributors in Odisha reduced buying by 10-20 percent, while in Karnataka they ordered 20 percent lesser stock than last year.
• In Punjab, distributor sales were flat over the last year, but witnessed some momentum sequentially.
• In Uttar Pradesh, demand witnessed some signs of revival in October-November, but then tapered off in December.
• In Gujarat, distributors had stopped stocking products of six consumer goods makers for nearly a month at the start of the third quarter because of disparity over discounts offered by FMCG companies to hypermarkets and supermarkets. That prompted All India Consumer Products Distributors Federation to seek pricing parity between various channels of trade by Dec. 31. The deadline has now been extended till March 31, 2020. Distributor sales in the state during the quarter fell 10-12 percent year-on-year.
• In Maharashtra, distributors’ purchase of stocks remained flat in some areas, while fell up to 10 percent in other parts.
• Distributors in Mumbai and Delhi-National Capital Region said demand was marginally higher compared to the corresponding quarter last year.

To be sure, north India contributes the most (31 percent) to the overall sales of consumer goods, followed by south and west at 24 percent and 21 percent in the east, according to Nielsen India.

Depending on product portfolio and regional contribution to sales, the impact will vary from FMCG company to company. If Marico warned of a decline in volume growth, Godrej struck a more optimistic note. The maker of ‘Cinthol’ soaps, in its quarterly pre-earnings update, said it posted mid-single digit volume growth in India during the three months ended December amid the slowdown.

The Adi Godrej group flagship company, however, expects a gradual improvement in consumer demand in the forthcoming quarters, driven by a good monsoon and government’s stimulus.

“We estimate volume growth to be in low-to-mid-single digits across companies,” said a research report published by analysts at Emkay Global Financial Service Ltd.

Aggregate sales for the third quarter are likely to grow at 5.7 percent year-on-year while Ebitda growth is likely to come in at 7.5 percent, the lowest since the first quarter of FY18, when demand fell off a cliff in the last month leading up to GST implementation, the Motilal Oswal note said.