FMCG - Q1FY14 Preview

In the last quarter of the previous fiscal, FMCG stocks have posted good results backed by better volumes and realisations. Let us look into how the companies will fare in the first quarter of the current fiscal and the trends that will emerge in the quarter.

If you have been a frequent visitor to your neighbourhood super market, you would have noticed the emphasis on advertising and promotional activity (A&P) in the last few months. Companies have intensified their A&P activities in the form of discounts, increased grammage, 'buy one-get one' offers, gift offerings etc. This is a result of the fall in input costs which have provided companies with a leeway to engage in such A&P activities.

A normal monsoon is highly critical for the overall economy and the FMCG sector as it would keep prices of agricultural commodities under check. This will result in low inflation and boost incomes of rural consumers.

However, the acceptance of these new launches has not created any stir in the markets and the stock prices of FMCG companies. The full impact can be seen in the later part of the fiscal as and when the brand visibility and brand acceptability increases among consumers.

While the reduction in commodity prices (key inputs) is a positive for FMCG companies, the same has been somewhat offset by the INR's depreciation. Thus, companies using imported raw materials are not expected to benefit much from the correction in commodity prices. Further, A&P expenditure too is expected to be on a higher side on a YoY basis for most companies. Some pressure is expected on the Operating Profit Margin (OPM) front.

However, the companies are likely to witness a better performance for the quarter. The temporary impact of LBT (in Maharashtra) will reflect on most companies' performance (two weeks' sales loss). The street is expecting topline growth of around 14% and bottomline growth of 13% on a YoY basis for Q1FY14.