The Edelweiss consumer goods pack’s revenue, EBITDA and PAT growth is likely to slow down to 2.2%, 2.2% and 2.0% y-o-y, respectively, in Q1FY18. Amidst GST implementation, there was significant destocking in the last 10 days of the quarter. Companies with high proportion of wholesale trade will be impacted more as our channel checks indicate that quite a few wholesalers have still not registered under GST. Gross margin expansion is unlikely due to higher promotions (though q-o-q raw material prices have come off), but savings in ad spends (many consumer companies have cut ad spends) will curtail overall margin dip. We expect the GST dust to settle down in case of distributors within first half of July, but wholesale trade is likely to take more time. Amidst confusion in terms of rules, input tax credit of inventory, IT software etc., consumer goods companies have seen destocking in trade in the last 8-10 days of June. The CSD channel, accounting for 4-5% of overall sales of consumer goods companies, destocked significantly throughout June.
Lower wholesale dependent companies such as paint players (expect 4-5% y-o-y volume growth), HUL, GCPL (domestic business to clock lower single digit sales growth), Britannia and ITC are likely to outperform companies with higher salience. While volumes of Dabur and Colgate are likely to dip 5-6% and 7-8% y-o-y, respectively, Emami’s volume fall is likely to be in lower double digits. United Spirits’ (USL) volumes may fall 8-10% y-o-y due to liquor ban on highways.
Prices of raw materials – palm oil, crude, sugar, wheat and copra – have cooled off q-o-q, though y-o-y they are high. Hence, any gross margin expansion when volumes are under pressure is unlikely. Except for Colgate, Emami and GCPL, most companies have cut ad spends, which will curtail margin dip.
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We believe, destocking is largely over and with IT software in place for majority of the distributors, business will return to normal in Q2FY18. However wholesalers could take a couple of months to stabilise. Hence, we expect some impact to continue in Q2FY18 and believe that Q3FY18 will be a normal quarter – better monsoon and some price cuts due to GST, especially in essential goods (toothpaste, soaps etc) can help volume growth to revert to mid to high single digit.