Mumbai : The quarterly earnings declared by the fast moving consumer good companies have been mixed so far, with most of them reporting lower than expected volume growth even as lower input costs helped the firms to improve operating margins.

While it was expected that the fast moving consumer good companies would report subdued volume growth in the June quarter due to weak rural demand, the volume growth has been even lower and management commentary points to further pain in the near term.

Dabur Limited that declared its result last week, reported domestic volume growth of 4% as against the analysts’ expectation of 6-7%. The continued weak demand scenario forced company to resort to promotional spends to drive this growth which in turn impacted its price realisations under new Indian accounting standards Ind AS.

The FMCG industry that derives substantial revenues from rural areas has witnessed marked slowdown in volume growth over the last 4-6 quarters on account of below-normal monsoon rains for the last two years.

Bajaj Corp too reported lower than expected volume growth of 0.8% on account of slowdown in rural market growth to just 1% even as volumes in the urban areas fell by 5%. Similarly Godrej Consumer Products too reported a flattish sales growth in the domestic business with total branded volume growing by just 3% as the delay in onset of monsoon along with stretched summer resulted in its household insecticides sales (that contributes nearly 40% to domestic revenues) declining by 11%.

Subdued demand, weak pricing power

Volume-led recovery for FMCG firms still some time away

Hindustan Unilever, the market leader also reported slightly lower than expected volume growth of 4% while its sales growth stood at 3.6% y-o-y primarily on account of weak rural demand. As per the management, the market value growth in the June quarter was down to half the levels that we saw in the previous quarter and down to a fourth of the levels that we saw same time last year. Also it stated that mass segment is more stressed than mid-priced, which in turn is more stressed than premium.

The saving grace for FMCG firms have been the benign input costs that helped them to continue reporting operating margin expansion.

Describing the current scenario of low volume growth as disconcerting, Hindustan Lever’s management believes that the outlook on near-term growth does look a tad uncertain given recent trends. However it remains optimistic on the medium to long term prospects as better than expected monsoons so far this year and seventh pay commission pay-outs are likely to aid the demand.

The management of Dabur Limited too is less optimistic on the near term demand revival as it is likely to continue running consumer promotions to drive volumes. It expects slight demand recovery to kick in post monsoons but is not sure if this would result in robust demand growth unless government provides big stimulus for rural areas.

Given this uncertain scenario, the stock prices for FMCG firms are unlikely to see a major run in the near term. With monsoons progressing well, the FMCG stocks have already rallied with S&P BSE Fast Moving Consumer Goods index rising 13.31% in last three months and are currently trading at rich valuation of over 50 times based on trailing 12 months earnings.

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