Q3FY14 Results Preview: FMCG Sector

The safe haven sector FMCG had been the blue eyed boy for the investors in the first two quarters of FY14. The reasons behind the same are the better growth in terms of volumes and better realisations. These two factors have helped the companies in the sector to come out with better results and in turn providing investors with better returns. Now, going forward how the earnings will pan out for Q3FY14 is what we are looking forward for in this article. Let us check out the factors which will determine how the earnings will pan out for the companies pertaining to this sector.

The third quarter of the fiscal is considered to be a better one. In Q3FY13 the companies in this sector has posted a volume growth in the range of 10-15 per cent. But in the current fiscal lack of consumer spending is likely to act as a dampener and the companies may post a volume growth in the range of 5-8%.

On the raw material prices front, the price trends of some of the key raw materials in the sector are showing mixed trends. In Q3FY14, we have seen the prices of copra and milk increasing to a significant level up by almost 65% and 40% respectively on YoY basis. Also, the prices for Palm fatty acid distillate (PFAD), Wheat, Barley, Soda Ash have also increased by 4%, 3.7%, 1.6% & 0.9% on YoY basis. Higher price for PFAD is likely to have a negative impact the margins for companies like HUL and GCPL which have a significant presence in soap business.  Also, the price increase in wheat and milk to have negative impact on companies like Nestle and Britannia industries. High copra prices are likely to have limited impact on Marico's gross margins, as the company has initiated price hikes in parachute, which would partly offset the impact of input cost inflation.

The BSE FMCG index fell by 4% during the quarter and underperformed the BSE-Sensex which gained by 9.2% during the quarter. Going forward, it can be said that the results for the companies will be muted and rationalisation of raw material prices and ad spends will be watched closely by the analyst fraternity as this will play a decider for the margins reported by the companies. However, we believe that the long term story on the consumption in the country still holds strong. Keep watch on results of companies like HUL, GCPL and Dabur India needs to be watched closely. We will take a call on the rating of the sector post all the major companies declare their results.