Even as many sectors are under pressure due to Covid-19, some like fast-moving consumer goods (FMCG) are believed to be in relatively better shape. Factors such as nature of products, likely margin support from lower input costs with a sharp correction in crude oil prices, augur well for the sector. This is why, in the last 10 trading sessions, the Nifty FMCG index has fallen 1.2 per cent, which is way better than the over 10 per cent fall in the Nifty50 during the same period. However, the road ahead is unlikely to be smooth, as the demand and supply related issues would take a toll on the sector’s overall performance till the June 2020 quarter.
While some segments like hygiene, home care and packaged foods would see demand spurt and rural-focused players could gain from the government’s package for farmers and the poor, the 21-day nationwide lockdown announced on Tuesday could have implications on supply chain and overall demand.
Dhaval Dama, analyst at Equirus Securities says, “A curfew or lockdown situation would impact the supply chain process with labour shortage and disturbance in supply of raw materials, and distribution could also be impacted. This could hurt the overall volume offtake.”
However, the concerns are larger for non-essential items such as beauty products, household items such as room fresheners etc, as the government has only ensured supply of essential goods such as grocery, milk, and hygiene products, among others during the lockdown period.
Given the large revenue share of non-essential products, many FMCG majors are expected to see topline pressure. For instance, in case of companies such as Marico, Dabur, ITC, Emami, and Hindustan Unilever, essential products account for up to 30-35 per cent of their respective topline, estimate analysts. But, rural sales also account for 30-50 per cent for these companies. On the hand, Nestle and Britannia are purely in packaged foods, and hence should likely see lower impact.
A few like Dabur have also informed stock exchanges about temporarily suspension of production of non-essential items till March 31 (this could now get extended with 21-day nationwide lock down).
This apart, even in case of essential items, organised players could face demand pressure as consumers may shift to lower priced products (down-trading) amid risk to income due to lockdown, say analysts. Income risk has also resulted in expectations of delayed demand recovery. A key positive is that raw material prices have fallen, which could aid margins.
Thus, like many other sectors how FMCG players strategise their overall business in the near term and how the above mentioned issues play out would be key differentiating factors, which investors should look out for. Moreover, valuations are not cheap as even now, the Nifty FMCG index is trading at over 100 per cent premium to Nifty 50.