The rapidly changing consumer goods (FMCG) sector is believed to be doing better, given the everyday products it sells. The expected margin gains from lower input costs, following the sharp correction in oil prices, reinforce this conviction. However, the road ahead can be difficult, as demand and supply issues are bound to weigh on their overall performance until the next quarter.
Although hygiene, home care and packaged food may experience higher demand, foreclosure will have a visible implication on the supply chain and overall demand.
Dhaval Dama, analyst at Equirus Securities, says: “A curfew or foreclosure will impact the supply chain process, with a labor shortage and disruptions in the supply of raw materials . Distribution could also be affected. “
Many consumer product companies have already experienced volume pressure over the past few quarters.
Concerns also arise due to the high share of income from non-essential products such as beauty products and household items such as room fresheners. Since the government only authorized the supply of essential products such as groceries, milk and hygiene products during the foreclosure, the sale of non-essential products may be affected.
For example, for Marico, Dabur, ITC, Emami and Hindustan Unilever, essential products represent up to 35% of their turnover, according to analysts’ estimates. Nestlé and Britannia, however, are purely packaged food, and therefore the impact may be less.
Some such as Dabur have also informed of the suspension of the production of non-essential items until March 31 (may be extended).
Furthermore, even for the most part, organized actors could face demand pressure, as consumers could opt for cheaper products because of the risk to income, analysts said. The income risk raised fears of a delay in the recovery of demand.
One of the main benefits is that commodity prices have dropped, which could help margins. Given the government’s financial envelope for farmers and the poor, some sales boost is also expected for the companies mentioned above, as rural India accounts for 30-50% of their turnover. However, it is unlikely to be enough to absorb the overall pressure on the top line.
The surge in FMCG stocks on Thursday, and their outperformance vis-à-vis the Nifty in the last 10 sessions, could now be called into question. In addition, valuations are still not cheap, as the Nifty FMCG index trades at a premium of over 100% over the Nifty.