Mkts eye HUL results to gauge GST impact

Investors are expecting the quarterly earnings report of Hindustan Unilever Ltd on Tuesday to reveal the extent of the impact of the implementation of goods and services tax on consumer packaged goods makers

Analysts tracking the company and the fast-moving consumer goods (FMCG) sector expect the company to report subdued earnings for the quarter ended 30 June as distributors liquidated inventory to avoid losses in the run up to the implementation of the GST on July 1.

This de-stocking happened as the government clarified that “transition stock” (goods sold by manufacturers but sitting with distributors, stockists or retailers) will be eligible for only 60% input tax credit.

“De-stocking and price discounts ahead of GST rollout” along with rising commodity prices are expected to hurt earnings, Morgan Stanley managing director Ridham Desai said in a 7 July note. Morgan Stanley expects June quarter revenue to grow 4% to ₹8,347.2 crore from a year earlier. It expects profit to rise 9% to ₹1,224.60 crore.

A Bloomberg poll of 10 analysts estimated HUL’s revenue for the quarter to be at ₹8,619 crore, a 7.9% rise from a year earlier. Net income may fall 4.8% to ₹1,183.5 crore, the analysts estimated. Seven analysts expected EBITDA (earnings before interest, tax, depreciation and amortisation) to decline 5.34% to ₹1,703.9 crore.

“We expect implementation of GST to have an adverse impact on performance of consumer companies in 1QFY18,” Sameer Deshmukh, an analyst at Reliance Securities, said in a July 11 note. “Lack of clarity over input tax credit on old stocks resulted in trade de-stocking its inventory in June before the GST rollout, which hit the primary sales of most consumer companies.”

“We expect the situation to be transient in nature and would reverse in the coming quarter,” Deshmukh said in the note. “Notwithstanding the near-term negatives, its implementation would be a definite long-term positive for the organised consumer industry in India.”

The biggest impact for consumer firms will come from a drop in volume growth for the quarter as trade channels thinned their stocks. “We estimate Q1FY18E volume growth to be impacted due to disruption ahead of GST for most companies in our coverage universe,” Amnish Aggarwal, an analyst at brokerage Prabhudas Lilladher, said in a July 11 note.