FMCG – AN ALL-SEASON SECTOR

In the past two days, two FMCG companies have declared their Q2FY21 earnings and the market has not exactly been gung-ho about them.

Britannia posted a 12% (YoY) rise in total consolidated revenue at Rs.3419 crore and its net profit came in at Rs.495 crore, up 23%.

HUL yesterday reported a 9% (YoY) increase in net profit at Rs.2009 crore on a 16% increase in total income at Rs.11,593 crore. What we also need to take into account is that HUL had merged GSK Consumer Healthcare India with effect from April 2020.

If both the companies had posted a good set of numbers, how come the market gave both of them a thumbs down, with both closing in the red yesterday and today too, they currently trade in the red? Its mainly the speculative syndrome of  “buy on rumour and sell on news.”

There is also a niggling doubt that Q3 might not be as easy as Q2. The pent up demand drove numbers in Q2 and rural economy too performed better on account of good monsoon, higher MSPs and demand relocation. But Q3, could see some pressure on margins on account of increasing costs and higher margins being offered to distributors to increase volumes.

Coming back to HUL, if you see the break-up of its, homecare products showed a 1% contraction while beauty & personal care was flat. It was food and refreshments which drove the engine – sales were up 19%. The growth in revenue was possible mainly on account of calibrated pricing and by rationalising trade spends.

Looking ahead, HUL has said:

• Cautious Optimism: The worst is possibly behind us; business picking up momentum
• Demand: Rural growths looking resilient and need to sustain. Urban demand outlook uncertain
• Inflation in select categories to continue; gross margins likely to remain under pressure

Britannia too had the evinced the same cautious optimism, expecting good monsoon and harvest to drive growth. Uncertainty on urban demand remains.

The truth is that demand is not yet as robust as pre-Covid days. What truly helps the bottomline is cost control management or ‘rationalising’ as the companies call it. Q3 demand recovery will be crucial as this is the festive season and ideally, discretionary spend should spike up, what with lockdown also easing all across.

In these uncertain times, as long as Covid remains, FMCG companies doing better than most is a certainty and that is what makes this sector, along with IT, the best bet in current scenario. Q3 is expected to be better than Q2 – costs will go up and we could see companies hiking prices to maintain margins but demand coming down? Naah, that’s not going to happen. In fact the festive season could see urban demand also showing a bump up. FMCG companies are best placed, cashing in on e-commerce - they are future ready, having made digital investments in the back-end as well as front-end .

Britannia and HUL are undoubtedly the crème de la crème of the sector and having them in the portfolio makes sense.