FMCG - Results Preview - Volumes expected to remain subdued - Reliance Securities

4QFY16 Results preview

We see no change in demand situation on the ground in both rural and urban areas during the Jan to March quarter of FY16. While rural demand continues to remain a drag, urban demand growth too has been below par. We expect our FMCG universe of 13 companies to post 4.2% growth in net sales and 7.6% growth in net profit for 4QFY16E. While input costs remain low on YoY basis and would assist in margin expansion, there has been an increase in select input costs qoq.

Budgetary boost for rural sector

Budgetary allocation for the rural sector was increased to Rs878bn for 2016-17. The government has also increased the allocation towards MNREGA to Rs385bn. The government has also provided Rs360bn towards agriculture and farmer's welfare. It has endeavoured to fast track the languishing irrigation projects to cover 28.5 lakh hectares of land. We believe that these schemes if implemented would be a key factor towards revival of rural demand, which has been stagnant over the past 4-6 quarters.

Hoping for a normal monsoon

Two successive droughts, lower minimum support prices and flat growth in rural wages have resulted in rural growth falling from a cliff in the previous few quarters. While all early indicators point to a favourable monsoon, clarity would emerge in the coming months. In its early forecasts for the season, Korean based Asia Pacific Climate Centre has predicted surplus monsoon for India during June-Sep'16. Similarly European Centre for medium range weather forecasts sees normal rain for India this season. Closer home, the scientists at the Indian Institute of Tropical Meteorology have signalled the highest probability for better than normal rains during June-Sep. A normal monsoon will be the most important factor in revival in rural demand (albeit with a lag), in our view.

Other highlights of the quarter

Patanjali Ayurved (PAL) continues on its uptrend and has reportedly doubled its revenues and closed FY16 with revenues of Rs50bn, which is an impressive achievement, in our view. While dominant segments for Patanjali are Desi Ghee, Toothpaste and hair oils, it has developed traction in several other categories such as Honey, Biscuits, Noodles among others. Colgate, Dabur and Britannia could be impacted by PAL in the medium term, in our view.

The government has notified that new pictorial warnings on cigarettes covering 85% of pack size would come into effect from 1st April'16. As per the existing norms, only 40% of pack size is covered by pictorial warnings only on one side of the pack. The notification is harsher than what the parliamentary committee had suggested to the government. We believe that the new images are quite gory in nature and would certainly have some impact on the consumer buying cigarette packs. However it is important to note that over 70% of cigarettes are sold in loose form in India.

Outlook and valuation

Volume growth reported by the FMCG companies was below par in past several quarters. The only saviour was lower commodity costs, which aided margin expansion. However as base period sets in and considering that some input costs have trended up in recent months, we believe that margin expansion would be difficult to come by going forward. Revival in volume growth would be the key factor to watch.

Valuations continue to remain rich. Our coverage universe is trading at 32x FY17E and 28x FY18E earnings. Excluding ITC, the valuation jumps to 37.9x FY17E and 33x FY18E earnings.

We continue to like ITC in large cap space. We also have a BUY rating on Dabur, Titan, Godrej Consumer and Bajaj Corp.

Source : Equity Bulls

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