Third quarter results for FMCG sector is likely to be a poor show.
Persistent macro-economic challenges and weak demand will continue to weigh down heavily on the third quarter performance of the FMCG sector. Brokerages anticipate that volumes for the sector will remain muted and so remain underweight on the sector despite rich valuations tapering off.
Unanimously, brokerages expect sales growth for the sector to be moderate at 11%, down from the 13% growth in Q3FY13. While standard chartered expects sales growth to be 11.1%, Religare expects it to be 10.6% and Motilal Oswal is setting an estimate of 12%.
Standard chartered says a revival in consumer demand is still not visible and volumes will remain muted even as the unfavourable rupee plays havoc on the bottomline. While margins for the sector are expected to be healthy as a result of the harsh winter and shifting the product mix in favour of high-margin products, PAT growth for the companies is expected to be muted due to a higher tax rate.
Also read: ITC Q3 PAT seen up 13.7% at Rs 2332.3cr: Motilal Oswal
Overall PAT growth for the sector is expected to be around 12%. HUL, Nestle could report a PAT growth of less than 10%.
FMCG sector valuations
Even though valuations have come off due to moderate performance of FMCG companies over the past 6 months, the current valuations look rich as there is no visibility on the demand outlook. Valuations in the sector have come off from a forward P/E OF 34-35X in Q1FY14 to a forward P/E of 28X IN Q3FY14 and this has led to a consolidation in the stock prices.
Seconding this view says Religare says, the risk-reward profile is unfavourable and recommends profit booking, and advises selective buying in mid-caps.
So they have a sell rating on HUL, Asian Paints, Colgate, Nestle and GSK Consumer Motilal Oswal, on its part, expects weak guidance for topline growth from FMCG managements.
A bigger concern, they say, is the moderation in growth from rural markets, which is narrowing the gap between urban and rural growth. With fundamentals deteriorating and valuation premium at peak, Motilal Oswal expects the sector to underperform going forward. This could lead to more equity funds dumping the sector in lieu of attractive sectors such as it and pharma.
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