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6 Things to expect from FMCG results in June 2017 quarter
The Goods and Services Tax (GST) is here. And there’s no doubt that it is a massive game changer, causing ripples throughout even before its implementation on July 1, 2017. Keeping this in mind, more eyes will be on financial results for the April-June 2017 quarter. Let’s look at what is likely to be in store for FMCG companies this earnings season:
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Revenue growth to slow:
A balance sheet is a statement of an institution’s assets and liabilities. This applies to both companies as well as financial institutions. Even the RBI publishes its balance sheet. But, the ‘twin balance sheet’ issue refers to the problematic balance sheets of Indian companies and banks—meaning, both the lenders and borrowers are under stress.
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What’s wrong with company balance sheets?
“We expect 1QFY18 to be subdued quarter overall with 1.8% aggregate revenue growth,” according to a report by Kotak Institutional Equities dated July 10, 2017. A key reason for this is the various pre-GST sales. Many companies wanted to sell their existing inventories and stocks before GST implementation. This is because they were unsure about the tax rates and other rules. As a result, they could not announce price hikes.
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Operating profit growth to take a hit:
The one-off GST woe is expected to affect companies’ Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) too. This measures the profits a company earns from its key business. Kotak Institutional Equities expects EBITDA to fall by 1-3% for the FMCG companies it tracks in the quarter to June 2017. This is despite a cut in advertising and promotional expenditure in anticipation of GST.
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Headwinds to the margin:
This fall in EBITDA is mainly because of a dual problem. On one hand, many raw materials like international/Kenyan tea, sugar, liquid milk, milk powder, LLP, copra, LAB and several paint inputs have turned inflationary, the Kotak IE report said. This means an increase in cost for consumers. On the other hand, the companies were not able to pass on price hikes to consumers because they were unsure of GST rates. This means lower revenues. As a result, margins are expected to narrow this quarter.
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Discretionary vs staples:
Kotak IE analysts expect that discretionary companies, which make non-essential goods, could perform better than companies that make staple, essential goods. “We estimate aggregate revenues for discretionary companies to grow at 3% YoY led by jewellery, Jubilant Foodworks, Page Industries and paints,” the report said. Staples are expected to suffer from the 5-15 days of sales in June ahead of GST.
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The positives:
Some companies are expected to buck the general trend of slow revenue growth or margin contraction. Staples like Hindustan Unilever and Godrej Consumer Products Ltd are not likely to face the same problem of a fall in sale volumes as the others. In fact, GCPL is expected to report strong volume growth across many categories, the Kotak IE report said.
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Will there be a continuous effect?
Another positive is that most companies expect the GST-led issues to smoothen out by August-end. They expect a recovery in their businesses from September, the Kotak IE report said after speaking to multiple executives. Moreover, this quarter is a one-off. The underlying consumer demand—which is what matters more for consistent performance—remains stable or in some cases, even rising.
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35.44%
TBetween January 1, 2017, and July 13, 2017, the BSE FMCG index rose 35.44%. This is much higher than the 21.78% increase in the BSE Sensex. However, in the last one week, the index has underperformed the Sensex, rising just 0.2%. The Sensex, meanwhile, rose 1.8%.
