It’s that time of the year again, analysts making calls to companies, distribution agents, sharpening pencils, updating excels and tweaking estimates to prepare for the quarterly earnings. For companies in the FMCG Sector, the task is a little more difficult than the others, because comparison of performance with prior quarters would be iffy due to the various distortions in the base variable.

FMCG sector earnings were most impacted by demonetisation & Goods and Services Tax (GST) related hiccups last year. GST rates for a large swathe of daily consumption items were revised lower in November 2017, so Q4 FY 18 will have the first full quarter impact of lowered prices and higher off-take.

In the previous quarter things started to look up. Almost every consumer company reported better-than-expected results coming off a very favorable demonetisation base. Margins improved due to benign raw material costs and GST uncertainty of the first half of 2018 was finding its feet again.

Most importantly, there was a heightened sense of optimism in the management commentary post earnings. For instance, Hindustan Unilever, in their Q3 earnings statement said “Expect gradual recovery in demand to continue” vs “In a challenging business environment, we delivered strong overall performance” just a quarter ago. Hence, the key expectation from the FMCG sector, in this quarter, is sustained recovery and positive management commentary.

As for the numbers, the sector, as a whole, is likely to see mid-single digit volume growth in the upcoming quarter. Additional GST rate cuts in November 2017 led to price cuts across products that may further increase off-take and aid volume growth. Post demonetisation and GST drubbing, the distribution channels seem to have recovered, especially wholesale & army canteen stores.

The industry seems to have sized up the scale & limitations of its fiercest competitor in recent times, Patanjali. That’s visible in HUL, GCPL & Dabur’s improvement performance in the areas they were most affected.

All eyes are on the margins for the FMCG sector this quarter. There may be some divergence between food and home and personal care companies.

For companies like Dabur, Emami, Marico and Britannia, who do have small exposure to the Middle-East and North African (MENA) region, the Street expects some improvement in reported results from the international business given a favorable base.

However, the big question that begets answering is, what price are investors paying for this increased optimism? At 45X FY19E, the sector does trade at elevated valuations, but if these companies meet the Street’s expectations with a hope for some more in the future, there’s no reason for investors to worry about the top dollar they’re paying for growth, opportunity and quality of management.

First Published:Apr 9, 2018 5:13 PM IST