Companies

Stockwatch: Slowing consumption hits growth

Parvatha Vardhini C | Updated on January 27, 2018

fmcg-table

Slack rural revenue, tepid urban spending hurts



Considering that the FMCG sector is normally regarded as a defensive in falling markets, the BSE FMCG index (15 per cent fall) did cap losses better than the bellwether Sensex (20 per cent fall) in the last one year.

But the picture could have been much better had consumption been stronger. Two continuous years of below par monsoon and absence of a push to rural incomes through other means of employment meant that many FMCG stocks fell prey to negative market vibes.

Secondly, urban sentiments last year were a bit dented too, though they have begun looking up in the last few months.

Weak volumes and price cuts to boost demand affected the top-line growth.

For the six months ended September 2015, net sales of FMCG companies part of the Nifty 500 index grew in single digits, by 7.6 per cent, over the same period last year.

Net profit growth though received a boost from a fall in cost of raw materials such as crude oil and palm oil (whose derivatives are used in various products from cosmetics to soaps to confectionary) and certain agri-commodities.

Net profits for the companies grew 10.4 per cent.

Net profit growth could have been higher but for the increase in advertising spends by most companies to improve demand.

HUL falters, good going for Godrej

With about 40-45 per cent of revenues from the rural markets, Hindustan Unilever bore the brunt of the slowdown. The company’s sales and profits grew in low single digits.

Although urban spending has picked up in recent times, the company continues to struggle with its strong presence in products with higher penetration such as soaps/detergents.

The stock has dropped 9 per cent in the last one year.

Stocks such as Colgate-Palmolive, Zydus Wellness and Agro Tech Foods have shown lacklustre top- and bottom-line growth in the first half of 2015-16.

These stocks have lost between 12 and 34 per cent in the last one year.

On the other hand, with products such as household insecticides that have more scope for penetration than soaps and also with premium products such as hair colours, Godrej Consumer continues to do well.

Good performance in its overseas operations also helped.

Higher minimum support prices for crops this year, greater government focus on rural India in the upcoming Budget and a further strengthening of urban consumption will help improve demand for consumer staples.

Published on February 14, 2016

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