Nomura Research expects a stable earnings performance of the consumer sector and the volume growth to remain subdued in the first half. It is bearish on Hindustan Unilever, Colgate Palmolive and Jubilant Foodworks, while it remains optimistic about ITC and Godrej Consumer.

Nomura Research expects a stable earnings performance of the consumer sector and the volume growth to remain subdued in the first half. It is bearish on Hindustan Unilever, Colgate Palmolive and Jubilant Foodworks, while it remains optimistic about ITC and Godrej Consumer.

Nomura Equity Research expects a steady earnings performance of consumer goods companies for the March quarter. It estimates average net sales are expected to rise by 12.6% year-on-year (y-o-y). It also expects the operating margins to move up by 0.3% and the net income of the consumer sector to rise by 12.5%, according to the research report titled 4th Quarter Results Preview.

Nomura says that the growth of the rural sector, which has been on a slow down in the past few quarters, is susceptible to a further decline. In the report, it says “Risk of poor weather this year could yet imply a rise in input prices as well as a ‘shock’ for rural income growth, which can put any potential recovery of rural growth in FY15F at risk”

On demand growth of the sector, Nomura states, “Company commentaries in terms of demand growth direction over the next couple of quarters will be keenly watched. Urban and rural demand is in a low-growth phase currently and consensus expectations are for a pick-up in FY15F – company commentaries will have an impact on sentiment heading into FY15F.”

Competition may increase the advertising and promotion (A&P) expenses of the consumer sector. Nomura implies that the input prices, which are considerably stable now are liable to rise due to the poor weather patterns. Commenting on the key issue, it says, “Management commentary on how input prices have been managed in the past when weather patterns have been uneven will be a key question across the sector during the quarterly results calls.”

In the consumer essentials, Nomura prefers ITC in large-cap companies, which is showing strong results due to the growth in cigarette business margins. It expects the net profit to increase by 15% on y-o-y basis. It is optimistic on Godrej Consumer Products (GCPL) in the mid-cap companies. It expects GCPL to deliver 18% growth in sales, but estimates muted net income growth due to higher tax rate on y-y basis.

Although Nomura expects the margins to rise by 0.3% y-o-y, it is pessimistic on Jubilant Foodworks (JUBI), Colgate Palmolive (CLGT) and Hindustan Unilever (HUVR). “We expect margins to improve by 30bp y-y for the sector, but we expect negative surprises from JUBI, CLGT and HUVR. The companies started to take some price increases during the quarter which should help maintain margins into FY15F.” It also expects a rise in the A&P costs in this quarter.

In the company specific earnings expectations, according to Nomura, although  Hindustan Unilever’s margins are expected to rise by 0.8%, the commentary is likely to be negative for the next couple of quarters. Colgate’s margins are likely to contract by 2.8% on y-o-y basis. Jubilant is expected to suffer a decrease in margins by 1.65% due to the lack of consumer sentiment, high rental cost and increasing competition.