Woes of sluggish revival in east and rural markets indicating lukewarm demand looms over sector
Fast moving consumer goods (FMCG) companies are bracing for a tough second quarter (Q2). After a disastrous first quarter, earnings Q2 would get impacted due to delayed recovery in overall rural markets, wholesale markets particularly in the eastern region, and severe cut down of supplies to defence canteens post the goods and services tax (GST) triggered destocking that impacted the sector.
While re-stocking is happening at a fast pace in most of the urban and semi-urban areas, revival is slower in east and rural areas raising concern over continuation of depressed demand in Q2 as well, several FMCG companies have told analysts.
"Destocking was particularly high among rural wholesalers. There is growth challenge but if we look at July, performance is encouraging. Currently, two-third of the wholesalers are doing business as usual. We expect it back to normal by end of August," Vivek Gambhir, managing director of Godrej Consumer has told analysts.
"Rural market would come back to normative level within a month or so. But in some geographical pockets, like in east, rural recovery would be longer than other parts of India. That's how GST has impacted," Gambhir said.
Among FMCG companies, the worst hit is Emami Ltd, whose Q1 bottomline has dropped a whopping 98% partly because of its dependency on rural India.
"Many wholesalers are still not ready for GST. There were uncertainties in some of the key markets and are still there. (Recovery) in east and north is slightly lower than the western region," Mohan Goenka, director, Emami has told analysts.
Among the most impacted brands is Kesh King whose marketing network has a wholesale of 70%, he said.
For Marico, rural sales declined 11% year on year whereas urban sales remained flat for the quarter, a ICICI Securities report on Marico post analysts' meet said.
The run up to the GST not only impacted wholesale markets but the defence sector's Canteen Stores Department sales also.
"Revenue from modern trade (10% of India turnover) grew 11% YoY. However, CSD and institutional sales (7% of domestic turnover) declined 15% YoY as it came to a standstill in June. Any recovery in the CSD channel is expected only towards the end of Q2FY18," the ICICI Securities report on Marico said.
For Emami, CSD stocks turned virtually nil during the quarter impacting its topline as well as bottomline, Goenka said.
...& ANALYSIS
- Emami Ltd was worst hit in Q1 with bottomline dropping a whopping 98%
- Among the most impacted brands was Kesh King
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