FMCG sector to do well over the next six to nine months: Abneesh Roy

"FMCG companies are extremely agile and they will also enjoy higher profit growth, higher EBITDA margins. Also they will not at all pass on the full benefit to the customer because last two years they have gone through this pain also," says Abneesh Roy, Nuvama Group.

When you look at the kind of numbers posted by at least two FMCG companies, HUL and Asian Paints, do you see any common threads emerging as far as the current state of the sector and the outlook for its growth and whether or not we are going to see FMCG really drive demand?
Yes, definitely I would expect the outlook for all the large listed FMCG companies to improve further. Definitely, if you see Asian Paints commentary also in December, they have seen double digit sales growth. Yes, in January, there could be some impact of the harsh winter in North India but that demand will come back. Plus marriage demand also is quite strong. Definitely because of the peak raw material sensation behind FMCG companies, they have multiple levers to use that promotion and the LUPs which saw huge impact in the last two years because of the grammage cuts etc. Grammages and promotions will come back which will again drive the volume growth.
Apart from these, FMCG companies are extremely agile and they will also enjoy higher profit growth, higher EBITDA margins. Also they will not at all pass on the full benefit to the customer because last two years they have gone through this pain also.

So they operate in a band of margins and whenever the raw material corrects and they do enjoy three-four quarters of high trend gross margins and EBITDA margins. Third point is definitely the D to C blood bath which is happening in our view that is clearly very positive for FMCG because FMCG companies will get opportunity to do M&A plus the competitive intensity from the start-ups of D to C will definitely reduce significantly because of the funding dry up.

Yes, the outlook is definitely improving and we will continue to prefer the leaders in the pack. Yes for HUL the royalty issue is a near term negative but in the broader scheme of things I think it is not too much of an issue. It is a near term issue but I think over a period of medium term this will clearly be absorbed and it will be back to fundamentals of the business.

So, if the latent demand is here to stay then the outlook is going to get more and more positive. But if you look at the last three months, the FMCG index has underperformed the benchmark Nifty and that has been the story. Now if you look at the next three to six months, what is the kind of outlook and if the outlook is as positive then which are the kind of businesses within the FMCG pack that you see drawing that much further growth, that much more traction when it comes to demand as well?
Over the next three-six months, I would expect the staples pack to do better. Overall there is a global recession so there is a risk off and FMCG companies provide much better visibility in terms of earning growth also. Second we will also see discretionary underperform. So, I am not referring to discretionary within FMCG, I am referring to the broader discretionary consumption say in the retail etc. because of the job losses in the start-ups and the job addition in the software and the IT pack also being at a multi-quarter low.

I think there is some headwind and some risk which is going to emerge over the next two quarters for urban consumption in such discretionary categories. But for FMCG, I think next two quarters urban will still grow faster than rural and post that rural should start coming back to much better growth numbers. So, yes, I will say that FMCG definitely is looking good.

Within FMCG, I think in the near term foods will clearly outperform. So, noodles, biscuits, etc. will gain because of the inflation for the lowest end of the customer. So we will see biscuits and noodles grow faster. And the personal care and beauty which has been languishing because of either delayed winter or because of the slowdown in the lowest end of consumption, I think that should also recover as these factors get addressed.

Overall, yes, we will expect Britannia, Nestlé, HUL even GCPL to do better. But definitely, FMCG is a good place to be over the next six to nine months.


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