On the time when city India was grappling with the primary wave of the coronavirus pandemic, rural demand had come to the rescue of makers fast paced shopper items (FMCG). However after the second wave, issues have flipped. There are issues that the as soon as bouyant rural demand is fading. With FMCG firms persevering with to battle extreme enter value inflation, muted rural demand provides to buyers’ discomfort. Additional, the administration commentaries of huge FMCG firms don’t present a lot readability on what lies forward on this entrance.
For example, the administration of Hindustan Unilever Ltd (HUL) turned a bit cautious on rural demand put up the September quarter earnings. This was in sharp distinction to its views on the annual buyers meet in August, the place the administration had mentioned rural demand was resilient and that the corporate was anticipating a passable yr.
In its Q2FY22 earnings convention name with analysts, the HUL administration mentioned that it was not clear whether or not some softening of demand is intermittent attributable to unseasonal rainfall or different components. So, it indicated that it prefers to intently watch how the agricultural demand pans out for a couple of months earlier than reaching a conclusion.
Concurring with HUL, competitor Dabur’s administration mentioned rural demand was robust within the months of July and August, however September-October noticed a slowdown attributable to liquidity pressures from wholesale channels.
Then again, the administration of Godrej Shopper Merchandise Ltd (GCPL) doesn’t appear too perturbed by this. They really feel that the slowdown in rural markets seems to be an optical phantasm, because of the unnatural base of Covid-hit months. GCPL expects rural demand to be a significant development driver on the again of two focus classes − hair color and pesticides. It needs to be famous that the agricultural market at the moment contributes to lower than 30% of the corporate’s gross sales.
“Slowdown in FMCG markets is a threat highlighted by us in addition to a couple of FMCG firms. Nevertheless, the image on the bottom just isn’t but clear, and whereas the chance stays, we chorus from truly calling out a slowdown until additional information is on the market,” analysts at IIFL Securities Ltd mentioned in a report on 24 November.
Talking of knowledge, an evaluation by Motilal Oswal Monetary Companies Ltd confirmed that double-digit common development in 1HCY21, rural consumption lastly misplaced steam final quarter, declining 2.4% year-on-year in 3QCY21/2QFY22. “As many as seven of the 11 indicators used to find out the developments in rural consumption contracted in 2QFY22, with double-digit development in just one indicator – farm credit score,” the home brokerage home mentioned in a report.
“Some FMCG firms are mentioned to have raised costs, so issues referring to inflation might start to recede. However the outlook on rural demand is marred by extra rainfall spoiling crops and muted rural wage development,” mentioned an analyst with a home brokerage home requesting anonymity. So, buyers in FMCG shares have to brace for one more draw back threat, which is more likely to weigh on valuations and share costs, he added.
Media stories mentioned that HUL, ITC and Parle have raised costs in choose classes of merchandise together with soaps and detergents to beat enter value inflation.
In keeping with IIFL, the inflationary atmosphere and worth hikes are making the image extra complicated. “FMCG merchandise have a worth elasticity of ~-0.5x per our expertise, which suggests quantity development shall be impacted negatively, however worth development shall be impacted positively,” added the IIFL report.
It isn’t stunning then that the Nifty FMCG Index is lagging key benchmark index Nifty50. On this calendar yr to date, the previous has risen 9%, whereas the latter is up 22%.
So far as valuations are involved, the shares of key FMCG companies resembling HUL, Nestle and Britannia amongst others, are buying and selling at a one-year ahead price-to-earnings a number of of greater than 55 occasions. Additionally, their valuation multiples are at a steep premium to their 10-year averages. The aforementioned dangers might result in moderation within the valuation multiples of FMCG firms, analysts mentioned.
Supply: Live Mint