Fewer hits than misses in FMCG as demand and supply concerns weigh


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 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 announced on Tuesday could have implications on supply chain and overall demand.

ALSO READ: Coronavirus LIVE: Govt stimulus to cover 800 mn Indians amid lockdown

Dhaval Dama, analyst at Equirus Securities says, “A curfew or 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 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.

ALSO READ: Post coronavirus lockdown, industrial demand for power plummets by 30%

A few like 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 index is trading at over 100 per cent premium to Nifty 50.

Next Post

Centre asks states to allow manufacture, distribution of packaged foods

The food processing ministry on Thursday sent an advisory to states under a nationwide lockdown to allow manufacturing, transport, distribution and retail of packaged foods and beverages amongst others—a move that’s expected to help companies like PepsiCo, Coke, and Nestle. Many packaged foods and beverage companies […]

Subscribe Now