Consumer goods firms show recovery in Q2

Supply chain normalisation to take time; analysts hope H2 of FY18 to be better

The September quarter of financial year 2017-18 appears to have brought some relief to consumer product companies reeling under a slowdown. The results of key firms show volume growth is coming back as they tide over trade challenges emanating from the implementation of the goods and services tax (GST) regime.

While supply chain normalisation will take time, analysts say the second half of FY18 will be better than the first. “Issues pertaining to the transition of trade to the GST will settle over the next two quarters. At the same time, there should be some recovery in sentiment,” said Abneesh Roy, senior vice-president, research (institutional equities), Edelweiss.

Barring Colgate-Palmolive, which felt the GST impact in Q2, most other firms whose numbers for the quarter were out, including Bajaj Corp, Asian Paints, Hindustan Unilever (HUL), Coca- Cola, and Emami, posted good volume growth in the July-September period (Q2).

While Bajaj Corp saw volume growth come in at 5.1 per cent in Q2 as against a decline of 7.8 per cent in Q1 of 2017-18, Asian Paints, HUL, Coca-Cola, and Emami reported a volume growth of 8 per cent, 4 per cent, 6 per cent, and 10 per cent, respectively for Q2.

Even Kolkata-based ITC, whose cigarette volumes were impacted by the latest round of tax revisions, reported a 10 per cent sales growth in its non-cigarette fastmoving consumer goods (FMCG) business. Underlying volume growth for the business was not shared by the company.

Led by categories such as personal care and packaged foods, ITC said growth in the non-cigarette FMCG business came despite sluggish demand and disruption in trade channels due to the GST. The wholesale channel, in particular, was yet to recover fully from the challenges emanating from the GST, the group said.

In a post-results conference, the country’s largest consumer goods company, HUL, also indicated the same, saying the early part of the second quarter saw trade purchases impacted due to the GST. “While consumer offtake remained stable, trade conditions will improve as we go forward,” P B Balaji, chief financial officer, HUL, said. MD & CEO Sanjiv Mehta said the medium term looked good for the consumer goods market, and that there would be a gradual recovery in demand, especially in rural areas.

Roy backed this view, saying rural areas would benefit from farm-loan waivers, an increase in minimum support price of six rabi crops, and the upcoming state elections in Gujarat and Himachal Pradesh. He said these factors along with a good monsoon spell this year should boost farm incomes, improving rural demand in the process.

A third of sales in the overall FMCG market in India comes from rural areas. For companies such as HUL, Dabur, and even ITC, the percentage of rural sales is higher than the industry average, said analysts, giving them an advantage over firms that were urban-centric.

In a recent investor presentation, HUL said the overall FMCG market had slowed to single-digit growth from double-digit growth five years ago. The company also said rural markets were lagging urban markets for the first time in five years, a sign which was not favourable for the market.

Mehta said at HUL’s second-quarter results conference last week that if there was room for growth in consumer goods, it was in rural areas as the penetration of products remained lower in the countryside in comparison to urban areas.