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Commodity correction to boost earnings of FMCG companies

Consumer goods companies will have to wait a little longer for a good set of quarterly numbers as the much anticipated urban recovery gets delayed. Results for the third quarter of the current fiscal are expected to be much like it was in the second quarter with volume growth muted.

Consensus estimates of leading brokerages as compiled by BS Research shows that revenue growth for the third quarter is expected to be in the region of 12%, in line with the second quarter.

However, net profit growth will be higher led by a commodity correction in the December quarter. According to consensus estimates, net profit growth will be 13% for the third quarter, almost 500 basis points higher than the profit growth reported in the September quarter.

Kaustubh Pawaskar, consumer goods analyst at Mumbai-based brokerage Sharekhan, says, “The fall in commodity prices has been fairly steep in the third quarter. Some benefit of this will be visible in the December quarter with almost a 400 basis point expansion in gross margins. This will improve profitability of companies.”

Volume growth, however, will hover in the region of 5-8% as consumers remain wary of splurging on goods, analysts tracking the sector said. “Volume growth seems to have bottomed out; further deceleration from current levels looks unlikely,” Amnish Aggarwal, senior vice-president, research, Prabudas Liladhar, said in a note on FMCG performance in the third quarter. “Demand environment,” he added, “was benign with a meaningful recovery in a couple of quarters.”

Analysts Krishnan Sambamoorthy and Aditya Joshi of Nirmal Bang also reiterate in their FMCG preview report for the third quarter that topline growth for companies will be weak on the back of muted volume growth.

With topline growth not expected to be strong, companies are expected to put much of their attention on curbing costs. Advertising and sales promotion (ASP) expenditure for the third quarter is expected to be a little lower than the trend for the three months ended December, which is the festive period. Analysts say ASP could be lower by about 100 basis points for the third quarter.

This festive period, in fact, was led less by traditional spenders such as consumer goods and telecom and more by new-age categories such as e-commerce and handset makers. E-commerce alone is estimated to have brought around Rs 200-300 crore of ad spends in the month of October 2014, which was when Dussehra and Diwali were celebrated. In the months of November abd December too, it was largely e-commerce and handset makers that called the shots in terms of advertising.

The stock markets have already priced in this weakness in the consumer market with the benchmark FMCG indices on both the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in the last one month falling twice that of the Sensex and Nifty respectively. Generally, a defensive sector such as FMCG moves up in a bearish market.

Clearly, the days ahead are not expected to be very rosy for FMCG.

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