In the packaged consumer goods sector, two trends stood out in the September quarter. One, the disruption caused by the goods and services tax (GST) is ebbing and volume growth is recovering. Some of it may be due to distributors stocking up after they pared stocks in the June quarter, but firms reported seeing signs of a demand revival.
Secondly, there seems to be an uptick in profitability of companies. Also, while firms are required to—and they affirmed that they have—passed on benefits of lower tax rates to customers, they may have retained some of the overall benefits of getting input tax credit (on taxes paid on services, for example).
Hindustan Unilever Ltd (HUL) reported a 4% volume increase from a year ago, after flat growth in the preceding quarter. Other firms Dabur India Ltd, Godrej Consumer Products Ltd and Marico Ltd also reported good volume growth. They said consumer demand was picking up gradually and that the trade channels were also gradually returning to normal business. Urban demand picked up pace and rural markets, too, are seeing demand improve, but not to levels seen earlier. The wholesale trade channel, which services rural markets, is recovering relatively slowly, especially in east India.
The value sales growth indicates firms are relying more on volume growth rather than price-led growth to drive sales growth. Despite price cuts to pass on the benefits of GST, many firms reported significant growth in earnings before interest, tax, depreciation and amortization (Ebitda), an indicator of operating profitability. For instance, HUL’s Ebitda rose 19.7%, while Godrej Consumer’s rose 15.7%. Colgate-Palmolive (India) Ltd was one of the few that disappointed, with volume declining by 0.9% while its Ebitda rose by 9%.
Broadly, management commentary suggests volume growth should continue to recover and second-half growth should be better, although bear in mind the low base effect due to demonetisation-related disruption a year ago. A cut in GST rates on key personal care categories in November should also help volume growth.
While the outlook for the sector is good, valuations are high, too, with the BSE FMCG Index trading at a price-to-earnings multiple of 41 times trailing 12-month earnings. FMCG is short for fast-moving consumer goods.