At an aggregate level, FMCG growth will see a strong recovery not only from Q3 which was impacted by demonetisation but also from the levels seen in Q2. The key driver is the return of strong price growth compared to deflation in H1 FY17, while volume recovery will likely be more modest. Stark divergence is likely between companies based on wholesale contribution. We expect strong divergence in the revenue growth within the FMCG sector. The key factor here is the adverse impact of demonetisation on the wholesale channel. Some categories of wholesalers are yet to see a full return to normal operations which is impacting companies which have higher contribution of wholesale.
Marico, HUL, GCPL likely to see best growth recovery; Dabur, Colgate, Emami to be subdued: We expect Marico, HUL and GCPL to see the strongest recovery in growth as they have relatively lower contribution of wholesale. There are also specific factors like the copra cycle driven volume gain for Marico and high price growth for HUL and GCPL in soaps. For Colgate, Dabur and Emami wholesale contribution is 50%. Dabur also has relatively higher distributor stock levels which could see downstocking. Colgate has taken steep price hikes in the low unit packs which will have an adverse impact on volumes. Dabur and Emami are also likely to see sharp decline in the Middle East.
Margin tailwinds behind, only HUL likely to see modest expansion: The tailwind from lower input costs is now fully behind and most companies are facing input cost inflation y-o-y. Companies have taken price hikes to pass this on, but the best case scenario is for margins to remain flat. Only HUL is sticking to its target of seeing modest margin expansion, which could come from a lowering of ad spends from a high base.
Overall revenue growth likely to see strong recovery
We expect the aggregate growth in FMCG to improve not only from Q3 but also from the levels of growth seen in Q2. We expect overall revenue growth for Q4 to be ~7% compared to a decline of 1% in Q3 and 5% growth in Q2. The key driver is higher price growth, as many categories like soaps, detergents, hair oils, toothpaste and biscuits have seen 5-10% price hikes. The rise in input costs is the immediate reason for the prices to go up in these categories. Volume growth is also likely to recover, though the recovery will be more modest compared to the recovery in price growth.
Stark divergence in top-line growth likely
While overall growth in FMCG will see a recovery, there is likely to be a lot of divergence in the pace of recovery. One of the key factors driving the divergence is the level of dependence that individual companies have on the wholesale channel. Companies like Marico, HUL and GCPL have relatively lesser wholesale dependence and are likely to see a faster recovery than Colgate, Emami and Dabur which have higher wholesale dependence.
Wholesale channel still not back to normalcy
Some category of wholesalers who worked almost entirely on cash are yet to fully return to their normal level of operations. One factor keeping away wholesale from re-stocking is the likely implementation of the Good and Services Tax on 1 July. The wholesale trade will not want to carry high stock levels as they will be unsure of getting input credit, and also there is an expectation of drop in prices in some categories like toothpaste. Thus these wholesalers are running with below normal level of stock holding in this period.
Margin tailwinds behind, only HUL likely to see modest expansion
The tailwind from lower input costs is now fully behind and most companies are facing input cost inflation y-o-y. Most input costs like crude derivatives, palm oil, copra, wheat, sugar are up substantially y-o-y in 4Q. Companies have taken price hikes to pass this on, but the best case scenario is for margins to remain flat. Only HUL is sticking to its target of seeing modest margin expansion, which could come from a lowering of ad spends from a high base.