We spoke to channel partners pan-India to understand on-ground situation post rollout of GST. As expected, the feedback was mixed but we gather 3 common points: Re-allocation of capital is underway, trade is adjusting to changing dynamics, and organised food companies are witnessing better growth, while non-food companies see huge variance depending on timing of promotions, stocking level, preparations ahead of GST and salience of wholesale channel. We believe the best way to play FMCG in these volatile times is via organised food companies such as Nestle, Manpasand Beverages, and companies such as Colgate and HUL which were prepared for GST rollout.
Our top picks in the sector are Colgate and Manpasand Beverages. Our interaction with FMCG trade ecosystem indicates that post demonetisation, this year’s income tax filing has seen a trend towards unwinding of ‘accounting adjustment entries’, which is leading to reallocation of capital. While unaccounted cash is flowing to discretionary consumption and unorganised jewellers, accounted money is curving to formal savings. The trade is also in the process to re-align its receivables as well as inventory days. We believe the trade is still searching for ‘optimal inventory’ levels and this issue should resolve earliest only by Nov 2017.
Unorganised and local players are losing market shares to organised players and they will have to reinvent their distribution infrastructure. While wholesale trade witnessed a poor throughput in July, August saw a pick up as GST officials clarified to distributors in meetings organised by companies that they can raise both tax invoice and retail invoice. FMCG companies have started putting higher impetus on direct distribution with higher van operations. HUL with its trade dominance and better preparedness ahead of GST appears faring better than most non-food players.