Published on 6/08/2020 11:10:25 AM | Source: ICICI Direct

FMCG Sector Update - Unprecedented quarter depicts FMCG resilience… By ICICI Direct

Posted in Broking Firm Views - Sector Report| #FMCG #Sector Report #ICICI Direct

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Unprecedented quarter depicts FMCG resilience…

Q1FY21 has been an unprecedented quarter with the lockdown impacting manufacturing & supply chain operations for a large part of the quarter. Though supply side issues were temporary, the demand pattern could have lasting impact on some categories. Moreover, new trends have emerged in the last three months, which would aid the growth prospects of some companies in our coverage universe. We observed two broad trends during the quarter. The surge in demand for categories like atta, biscuits, edible oil, and salt is temporary given consumers stock up essential either before or during lockdown period. However, growth in categories like soaps, sanitisers, immunity boosting products (Chyawanprash, Honey), some packaged foods categories (shift in pulses from loose to package) could be structural in nature.

With the consolidation of acquired companies’ revenue for HUL, Tata Consumer Product, the numbers are not comparable. We estimate 10.6% revenue decline for our coverage companies largely impacted by a significant dip in cigarette companies (ITC, VST Industries) revenues. Cigarette companies witnessed the biggest dent in the lockdown period with sales loss for 40-45 days during the quarter. Further, these companies recovered volumes to pre-Covid-19 levels only in mid-June. Hence, we estimate ~50% drop in cigarette volumes during the quarter.

Other FMCG companies restarted manufacturing only in the second half of April but permission to start plant largely depended on essential & nonessential categories. Manufacturing facilities producing packaged foods, hygiene products (soaps, sanitisers) started early (within 10 days of lockdown) compared to products more discretionary (hair oil, skin care products, cosmetics) in nature. We expect 12-17% revenue decline for HUL (ex-acquisition), Dabur and Marico. Including the acquisition numbers for HUL, we expect a revenue decline of 2.4%.

Some categories like hair care, skin care, cosmetics, ice-creams have been adversely impacted during the quarter whereas soaps, sanitisers, edible oil, health supplement witnessed healthy growth. We expect foods companies like Nestle to remain largely unaffected by the lockdown as the company was able to refill the trade pipeline in June quarter with production coming back to normal. We expect Tata Consumer Products to post 10% revenue decline (ex-acquisition). However, including acquired business numbers, it is expected to report 27.5% growth in sales. Its revenues were impacted by multiple factors. The decline in out of home consumption of tea was partially offset by in-house increase in demand. We believe acquired salt & pulses business is likely to witness strong growth in April & May given stocking up by retailers & consumers.


Sequence from lockdown to unlocking

Most companies were able to fulfil April (as and when distribution starts) demand from existing March inventories at companies as well as at the distributor levels. With companies reaching only ~70% of the normal manufacturing by the start of May, the trade pipeline got depleted fast while companies were unable to fulfil the entire demand in May 2020. However, in June, production levels reached near 100% of pre-lockdown levels while companies were not only able to fulfil the month’s demand but were also in a position to refill trade inventory at previous levels.


Benign commodity cost offsets negative operating leverage

The sharp decline in crude based commodity prices is likely to reduce packaging cost for FMCG companies. This coupled with stable commodity prices are expected to result in an up-tick in gross margins (except Tata Consumer Products), which is expected offset the negative operating leverage impact on operating margins. Excluding ITC & VST, we expect similar margins (23.3%) for our coverage companies. Copra, palm oil & sugar prices have remained largely stable whereas milk prices, which were at elevated levels before lockdown, dipped sharply in April. However, tea prices rose ~20-40% in June with 140 million kg of lower production between January-June due to lower availability of labour. This would negatively impact operating margins for Tata Consumer Products & HUL’s tea business. Our coverage universe net profit is expected to decline 16.3% largely impacted by a decline in ITC’s earnings.


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