FMCG firms witness Q1 hit, but greenshoots seen in demand

Abhishek Law Kolkata | Updated on June 19, 2020

The personal care segment, with the highest proportion of discretionary products, will witness the steepest decline, while the home care segment will be the least affected because of its high essentials quotient and rising hygiene awareness.

FMCG majors across India may see summer sales and Q1 FY21 numbers take a hit as discretionary purchases — such as personal care and beauty items, and out-of-home consumption — remain slow moving. Some greenshoots, however, are visible.

Market sources say health & hygiene and food continue to be major demand drivers with new entrants and different product categories coming up. But even then, recovering nearly over 30 days of sales loss (all of April and staggered recovery in May) is a near-impossible task.

Crisil, in a recent report, maintained that FMCG revenues are expected to de-grow 2-3 per cent this fiscal. Sales have been derailed, it maintained. Despite the revenue drop, operating profitability will be at 18-19 per cent because of “pruned ad spends” and “softer input price”.

“Diversification into health and hygiene will not help much when it comes to shoring up Q1 sales. One whole month was lost due to the Covid-induced lockdown. Naturally, it is difficult to recover this lost month,” Abneesh Roy, Senior Vice-President, Institutional Equities, Edelweiss Securities, told BusinessLine.

Impact on revenue

Most FMCG companies are operating at 75-90 per cent levels now. But out-of-home consumption like ice-cream an on-the-go juice packs is badly hit. Some recovery is witnessed across large (or family) packs in juices.

Anuj Sethi, Senior Director, Crisil Ratings, in a report, observed that growth in the food and beverage segment (accounting for 50 per cent of revenue) will mirror the overall sector’s performance. And, segments such as ice-cream and beverages would see a steeper fall because of revenue loss for the major part of summer.

The personal care segment (25 per cent of sector’s revenue), which has the highest proportion of discretionary products, will witness the steepest decline, while the home care segment ( 20 per cent) will be the least affected because of its high essentials quotient and rising hygiene awareness.

Health & hygiene: Long-term play

“Health and hygiene consciousness has intensified in the current scenario. People are seeking healthier or immunity boosting alternatives, leading to an increase in health and hygiene products in an FMCG company’s portfolio,” said a Marico spokesperson.

Over the past three months, offerings such as wipes, fruits and veggie wash, disinfectant sprays and air-sprays have been launched by ITC, HUL and Marico, among others. Others, such as Godrej Consumer Products, are mulling an entry into new categories under home care. In fact, the hand sanitiser and handwash market has a spurt of entrants such as VLCC, Emami, Jyothy Labs and CavinKare.

The impact of companies ramping up such offerings needs to be seen on a long-term basis. “Any new category will take time to pick up. And health & hygiene is extremely fragmented with too many players in it,” Edelweiss’ Roy pointed out.

‘Nightmare’ quarter

Edelweiss, in a report, has maintained that amid the pandemic, “it’s given that Q1 FY21 will be a nightmare quarter for almost all sectors.” Dabur has already quantified the negative impact and HUL, too, is likely to take a substantial hit, it said, adding that “Q1 FY21 (is) recovering, but still not fully.”

Emami, in a recent notice to the bourses, said: “Even before the implementation of the nationwide lockdown, restrictions on movement by various States affected the supply chain from mid-March.” Operations until the first fortnight of April witnessed significant disruptions, thereby “affecting the pre-season sale of the company's summer products”.

Further, a decline in consumption was witnessed due to rising unemployment and drop in demand from low-income groups. This led to a consumer shift towards more essential products such as food and groceries, “affecting the sale of niche and discretionary products”.

Dabur’s management, in an earnings call, mentioned that there is likely to be an estimated impact of ₹400-450 crore on revenue and ₹60-80 crore on profit after tax in Q1 FY21. However, it added, the company is witnessing “huge recovery in May” demand.

Marico, in a stock market notification, said its business overall experienced gradual improvement from the mid of April to June 5, and is currently clocking more than 90 per cent of the FY20 average monthly sales. Edible oils and foods (Saffola), and coconut oils (Parachute) have shown resilience, while value-added hair oils picked up from April-end onwards. Personal care categories (premium hair care and male grooming) continue to move slowly.

Rural sales

Market sources indicated chances of faster-than-expected recovery in rural sales. Factors such as good monsoon, MNREGA payments, how the government stimulus plays out and also faster normalisation from Covid-19 will be key factors.

Low unit packs (LUPs) and how well companies adopt go-to market strategies will also determine rural sales.

Dabur CEO Mohit Malhotra, during an investor conference call, mentioned the high reliance on rural and said the company “was seeing traction coming from sub-stockist network” spread across the country.

“Rural will surge ahead of urban. Next one quarter, I think rural will be moving ahead...While it will be more for staples, even for a portfolio like toothpaste, etc, the impact should definitely be there,” he said.

Published on June 19, 2020

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