The third quarter of FY19-20 has registered the lowest growth for consumer goods companies since the first quarter of FY18 (due to GST-related de-stocking), says an Edelweiss Report. The report says that the overall consumption slowdown dented consumer staples volume growth 1.4 per cent year-on-year in Q3FY20 from 4.7 per cent in Q2FY20. "Our coverage universe's revenue, EBITDA and PAT rose 4.0 per cent, 11.3 per cent and 24.1 per cent YoY versus our estimates of 5.4 per cent, 9.7 per cent and 17 per cent, respectively. EBITDA and PAT growth surpassed our estimates on account of companies cutting ad spends and sharpening focus on cost rationalisation," says the report
Rural growth continued to be a dampener, staying at 0.5X of urban growth. While the likes of Nestle posted their highest revenue growth of 10 per cent YOY, the growth came on the back of its urban penetration strategy (Nestle has low rural exposure), companies such as Bajaj Consumer Care, Emami and Marico, which get considerable proportion of revenue from rural markets, underwent a volume dip. The likes of Godrej Consumer Products did see increase in volume growth (7 per cent), so did HUL and Dabur. However, the Edelweiss Report attributes the slight increase in volume growth to their distribution heft. "One classic sign of slowdown, dip in the number of new launches was also evident. Additionally, liquidity crisis continues to dent wholesalers and retailers, thereby exerting pressure on trade pipeline," the report states.
Given their high exposure to crude derivates, Asian Paints, Berger and Pidilite continued to benefit from softer crude prices leading to YoY gross margin expansion of 204bps, 301bps and 655bps, respectively. Better inventory management led to Marico's gross margin jumping 282bps in spite of copra prices perking up 4.7 per cent YoY. However, further expansion is likely to be limited, says the report. On the flip side, inflation in agri-linked commodities such as milk, wheat and sugar dragged Nestle's and Britannia's gross margins by 218bps and 107bps YoY, respectively.
The Edelweiss Report, however, hopes for a turnaround. "A good Rabi season along with food inflation and payouts under the PM-Kisan Scheme are likely to prop up farmers' incomes, which may revive volume growth for consumer companies. Soft crude prices will also benefit margins of paint and adhesive companies," it says.