Majority of the FMCG companies had reported tepid growth in revenues and net profit for the first quarter of FY 2017-18. Volume growth had also declined in the first quarter of FY 2017-18. However, there is a hint of recovery in the revenues and profitability for the FMCG companies as indicated in their second quarter performance. For FMCG companies volume growth is of higher significance as revenues may tend to be higher due to rise in costs of raw materials that are passed on to the customers. Revenues may even tend to be lower if there is reduction in prices due to passing on the benefit to the consumers such as that of the lower taxes for FMCG products due to GST implementation. Higher volume growth reported by major FMCG companies indicates that demand for products has improved on a year on year basis in the urban and rural areas.
Hindustan Unilever had reported a flat volume growth during the first quarter ended June 2017 but has now shown a recovery and reported a volume growth of 4% during the second quarter ended September 2017. The company had indicated that the sentiment during the first quarter was cautious in the run up to GST rollout as despite high promotional intensity, stock pipelines remained low and varied across categories, channels and geographies. For the second quarter transition to GST impacted trade purchases in early part of the quarter and consumer offtake remained stable. Trade conditions continue to improve and the wholesale channel is steadily normalizing. Festival season to some extent may have contributed to the volume growth in the month of September 2017 for the company.
Dabur had reported a 4.4% decline in the volumes on a year on year basis in Q1FY18 but reported a 7.2% volume growth in the September quarter. The Oral Care business for Dabur, led by continued demand for Dabur Red paste, continued to move forward on its strong growth trajectory and ended the quarter with around 23% growth. The Skin Care and Salon business reported a 16% growth during the quarter, while the Foods business ended the second quarter with around 12% growth. The overseas business performance for Dabur was hit by a combination of steep currency devaluation in Egypt, Turkey and Nigeria, and the continued geopolitical disturbances in key geographies. With consumer demand for nature and Ayurveda-based products on the rise companies like Dabur would be able to sustain the recovery in volume growth in the near future as well.
Marico saw volume growth of 8% in the September quarter compared to a 9% decline the previous quarter. The volume growth was mainly attributable to competitive pricing, continued investments & pipeline refilling in general trade.
Colgate-Palmolive (India) had reported a decrease of 3% over Q1 of the previous year in revenue, largely due to destocking in the trade channel ahead of the implementation of GST. Volume had declined 5% during the first quarter. For the second quarter excluding the impact of GST and indirect taxes implementation the net sales grew by 3% on a year on year basis. The Company continues to maintain its leadership position in both the Toothpaste and Toothbrush categories, with volume market shares for the period Jan-Aug 2017 were at 54.0% and 45.5% respectively. Volume growth was flat for Colgate in the second quarter of FY 2017-18.
Restocking by most of the dealers has contributed to the recovery in volumes for FMCG as they were affected by destocking prior to the implementation of the GST due to uncertainty. Better than expected monsoon will be able to fuel rural demand, boost demand & consumption, bring down inflation and will help earnings growth of FMCG companies in the time ahead. The third quarter of the FY 2017-18 is expected to show higher growth in volumes for FMCG companies because of the low base of a year ago due to the invalidation of high value notes.
The valuations continue to be expensive for FMCG companies with the P/E being in the range of 47 to 62 for companies mentioned in the table. A shift from the unorganized to organized players in the domination for market due to the GST implementation is expected to benefit large FMCG companies and is therefore keeping the stocks on boil.