Marginal Revenue Growth due to GST-led destocking
As the nation implements the one nation, one tax, the pre-effects of Goods and service Tax (GST) on the Consumer Products are not pleasant. According to the Kotak Institutional Equities, the performance of the first quarter for the fiscal year 2018 is expected to be weak and volatile, especially for staples companies due to GST-led destocking. A subdued quarter is expected overall with marginal revenue growth of 1.8 percent and 1 to 3 percent decline in the aggregate operating and net profit margins for the coverage universe.
GST-led destocking impacted sales in June
Over second half of June’17, several companies stopped generating the bill between June 20 and 25 itself, which led to destocking of inventory at much higher pace and from end of May’17, trade started to decrease as indicated by most of the companies.
Wholesale trade continued to destock, whereas the higher presumptive credit of up to 60 percent (from earlier 40 percent) facilitated in smoothening of the transition. The net impact has been that most companies lost their sales between 5 to 15 days in June; the companies with higher inventory in trade were impacted more.
Destocking played out differently in different channels
Retailers: Retailers are relatively lesser impacted as of them have a turnover under Rs 0.75 crore and will remain under composite scheme. They will liable to pay 0.5% of turnover as tax.
Large MT: Most companies have engaged in one to one discussions with large MT partners – companies are better equipped to handle this channel as dealing with few large players.
Canteen Stores Department (CSD): Most FMCG companies derive 3 to 5 percent of their sales from CSD channel. This channel has been heavily impacted; it virtually stopped fresh orders for the month of June.
Wholesalers: This channel has been impacted witnessing different impact in different parts and most wholesalers didn’t want to get into the hassle of claiming credit.
Companies efforts to smoothen GST transition
Despite the communication from companies, which stated losses on transitory stock will be compensated – will get subtracted from net sales value in the current quarter itself thereby resulting in lower-than-expected realization growth for most companies, yet destocking of inventory increased in June.
Companies resorted to quite a few ways to iron out the effects of GST. Some of these are:
Other GST-led challenges and recovery for companies
Apart from the current GST-led challenges, some categories saw destocking of inventory as under the lower rates of GST will likely lead to price reduction for these categories and trade did not want to have higher-priced old stocks.
The GST-led issues are expected to smoothen out by the end of August’17 and recovery will begin from September. On demand side, most of the companies have indicated that consumer off-take remains stable and some of the companies are already witnessing acceleration from the levels of the last quarter of fiscal 2017.
Discretionary companies to perform relatively better than the staples
The aggregate revenues for discretionary companies are expected to grow at 3 percent on year to year basis led by jewelry especially Titan Industries, which has low base, good season and gaining market share. The growth in revenue is followed by 3 percent same store sales growth for Jubilant Foodworks (JUBI) aided by its everyday value offer. Also, page and paints adds to the revenue growth.
The discretionary companies exclude alcohol – it is likely to remain silent for revenue during the quarter due to destocking on account of highway liquor ban.
Volumes expected to decline for staples universe
The aggregate revenue for staples is to grow marginally by 0.6 percent on year to year basis. This is primarily driven by the increase in prices as the volumes are expected to decline across most companies or categories excluding, Hindustan Unilever Ltd (HUVR) and Godrej Consumer Products Limited (GCPL).
For GCPL, positive volume growth is expected across domestic categories and for HUVR, the underlying volume growth (UVG) is expected to remain flat on year to year basis due to destocking impact.
Companies such as Bajaj Corp, GlaxoSmithKline Consumer HealthCare Ltd (GSK-CH), Colgate Palmolive (India) and Marico are likely to report 4 to 7 percent volume decline due to the sales lost in the month of June due to GST-led destocking of inventory.
On the international front, the sharp currency depreciation in countries such as Egypt, Nigeria, Turkey, Argentina and UK (British Pound) is likely to hit companies such as Marico, Dabur, GCPL and Tata Global Beverages Ltd.
Growth across Businesses
The cigarettes business is expected to model 1.5 percent revenue growth whereas the other businesses such as FMCG, hotels, agri-business and paperboards are expected to decline in terms of growth or remain flat.
The domestic FMCG segment of HUVR is expected to post 2 percent growth in revenues driven by price-led growth; its home care and personal care segment will also register growth.
Raw material headwinds and negative leverage to hit margins
Administrative & selling prices (A & SP) decreased by 0.25 percent as companies deferred their advertising, media spending and launched the much anticipated GST-led disruption in the trade. Despite the cut in A & SP, the aggregate operating margin is likely to decrease by one percent on year to year basis. Additionally, one percent decrease in aggregate gross margins and negative leverage due to weak revenues, would lead to EBITDA margin contraction across companies.
Companies expected to post expansionary EBITDA margins are: JUBI - due to positive same store sales growth, United Spirits - part of margin expansion is optical in nature due to move towards franchising several states and expansion in EBITDA margin for Varun Beverages is aided largely by gross profit margin expansion.
Companies such as PC Jeweller, GSK-CH, Bajaj Corp and Britannia Industries will register 2 percent decrease in operating margin and hence post decline in their earnings.
Profitability
Gross profit margins will be impacted due to price increased in first quarter along with inflation in several of the key inputs. The price increase in the first quarter of ongoing fiscal is due to uncertainty in GST rates. Several key inputs such as Kenyan tea, sugar, liquid milk, and milk powder, copra, light liquid paraffin (LLP), LAB and some paint inputs are inflationary this quarter – most of these inputs touch double-digit inflation.
According to Kotak, 14 out of 24 companies covered will see contraction in their gross margins and nine companies to register one percent cut in aggregate gross margins.
The overall operating margin of cigarettes is expected to decline by one percent on year to year basis.
