Fast moving consumer goods companies are likely to report a 5-6% drop in net profit during the third quarter due to the hit on sales that they witnessed post-demonetisation drive, says 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% and 5-6%, respectively,” Kotak Institutional Equities said in its pre-earnings season report today.
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 noteban has yanked a whopping Rs 1.2 trillion or 10.2% 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%, 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%. For staples, we expect aggregate revenues to decline 1.5% as we model volume decline across categories,” it said.