FMCG firms to report 5-6 per cent drop in profits due to demonetisation

Fast moving consumer goods (FMCG) firms are likely to witness a 5-6 per cent drop in net profit during the third quarter as sales have been hit hard by the post-demonetisation drive, said a brokerage report in the run-up to the earnings season beginning this week.

“We expect the third quarter to be a dismal period for the FMCG companies as their aggregate revenue and net profits are likely to decline by 0.2 per cent and 5-6 per cent, respectively,” Kotak Institutional Equities said in its pre-earnings season report on Wednesday.

The report attributes this fall to a 120 bps pretax aggregate pretax margin contraction, due to 50 bps contraction in aggregate gross margins owing to pick up in raw material inflation, led by agri-inputs. This is despite the despite 30 -40 bps cut in advertising and sales promotions budget.

The government had on November 8 banned old Rs 1,000 and Rs 500 banknotes worth around Rs 20.51 trillion, in a bid to control black money and counterfeit notes.The note ban has yanked a whopping Rs 1.2 trillion or 10.2 per cent from the market capitalisation of consumer goods stocks since then.

Out of this as much as Rs 99,000 crore value erosion are from FMCG stocks alone. For the consumer goods sector as a whole, sales are down a whopping 40-70 per cent, according to analysts. However, Kotak expects jewellery and paints companies to fare slightly better in terms of aggregate revenue in the reporting quarter.

“Overall, we expect discretionary companies to perform relatively better, especially jewellery and paints. We estimate aggregate revenues for discretionary companies to grow 1.5 per cent. For staples, we expect aggregate revenues to decline 1.5 per cent as we model volume decline across categories,” it said.