The equity market responded negatively to the results of FMCG companies as the underlined stocks fell after their management indicated weakness in consumption going ahead.
Four FMCG companies—Britannia Industries, Dabur, Godrej Consumer Products Ltd (GCPL), and Hindustan Unilever (HUL) reported their quarterly earnings this week.
Britannia Industries and Dabur India's managements reignited concern over a slowdown in consumption. HUL too indicated a slowdown in market growth led by rural consumption.
Market research firm Nielsen has lowered its growth projection for India's FMCG market to 11-12 percent in 2019, down from 13.8 percent in 2018.
Weakness in consumption is likely to stem from a slowdown in the rural economy and shortage of funds due to the ongoing liquidity crisis in non-banking finance companies (NBFCs).
HUL reported a 7 percent volume growth in the March quarter–the lowest in six quarters–largely due to a moderation in demand from rural areas.
Following the slowdown in demand, HUL, the country's largest FMCG company, remains cautious over the near-term demand outlook."The macroeconomic data is also showing that rural demand has moderated," Sanjiv Mehta, Chairman and Managing Director, HUL said.
Despite these concerns, the company reported earnings stronger numbers than its peers. On May 3, HUL reported a 13.8 percent year-on-year (YoY) jump in net profit at Rs 1,538 crore for the fourth quarter ended March 2019.
The company announced its earnings after market hours. On May 3, HUL shares closed at 1,693.55 rupees, down 1.7 percent, from the previous close on the National Stock Exchange.
HUL's earnings are considered as the bellwether for the domestic FMCG industry as it helps to gauge the consumer demand and monitor sentiment.
In terms of Dabur, the volume growth at 4.3 percent in the domestic business came on a high base of 7.7 percent in Q4 FY18, it was in sharp contrast to the average 12 percent volume growth seen in the last six quarters.
Dabur consolidated net profit in Jan-Mar fell 6.5 percent on year to Rs 371. 49 crore. The company's operating margin also contracted 290-basis-points. This dragged down the share price by almost 4 percent.
The prime factors impacting the performance of Dabur were structural as one of them is slowing rural growth, which the company has been flagging for a while.
While about 45-50 percent sales accrue from rural areas, farm sector distress has been weighing on FMCG demand.
Till September 2018, rural demand was growing at 1.3 times that of urban demand, but that has moderated to 1.1 times for the past few quarters.
Biscuit maker, Britannia Industries management said there is a 'slowdown in market place in the recent months' which will be closely watched in the near term.
The company said it will undertake gradual price hikes to mitigate the high expenses. However, the rise in prices may hit the already-slackened rural demand.
The company reported 11.82 percent rise in the consolidated net profit at Rs 294.27 crore for the fourth quarter ended March 31, 2019. The company had posted a net profit of Rs 263.16 crore in the corresponding quarter of the previous fiscal.
Despite strong results, shares of Britannia Industries fell nearly 4 percent on May 4 due to fears that the company may see a contraction in operating margins in the near term due to a rise in input costs.
Shares of GCPL closed 2 percent lower as its volume growth in the domestic market disappointed investors. The company said that volumes grew merely 1 percent in the domestic market during the quarter as a delayed summer and a slowdown in demand hit the company's sales growth.
The maker of Cinthol Soap and GoodKnight repellant, GCPL reported a 51 percent jump in its Q4FY19 net profit at Rs 935.2 crore against Rs 617.19 crore in a year ago period.