Markets await HUL results to gauge GST impact on FMCG sector

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Mumbai: Investors are expecting the quarterly earnings report of Hindustan Unilever Ltd on Tuesday to reveal the extent of impact of the implementation of goods and services tax (GST) on consumer packaged goods makers.

Analysts tracking the firm and the fast-moving consumer goods (FMCG) sector expect it to report subdued earnings for the quarter to June as distributors liquidated inventory to avoid losses in the run-up to implementation of GST on 1 July. This de-stocking happened as the government clarified “transition stock” (goods sold by manufacturers but sitting with distributors, stockists or retailers) will be eligible for only 60% input tax credit.

“De-stocking and price discounts ahead of GST rollout” along with rising commodity prices are expected to hurt earnings, Morgan Stanley managing director Ridham Desai said in a 7 July note. Morgan Stanley expects June quarter revenue to grow 4% to Rs8,347.2 crore from a year earlier. It expects profit to rise 9% to Rs1,224.60 crore.

Bloomberg poll of 10 analysts estimated HUL’s revenue at Rs8,619 crore, an increase of 7.9% from a year ago. Net income may decline 4.8% to Rs1,183.5 crore.  Seven analysts expected Ebitda (earnings before interest, tax, depreciation and amortization) to fall 5.34% to Rs1,703.9 crore.

“We expect implementation of GST to have an adverse impact on performance of consumer companies in 1QFY18,” Sameer Deshmukh, an analyst at Reliance Securities, said in a 11 July note. “Lack of clarity over input tax credit on old stocks resulted in trade de-stocking its inventory in June before the GST rollout, which impacted the primary sales of most consumer firms.”

“We expect the situation to be transient and would reverse in the coming quarter,” Deshmukh said in the note. “Notwithstanding the near-term negatives, its implementation would be a definite long-term positive for the organized consumer industry in India.”

The biggest impact for consumer firms will come from a drop in volume growth as trade channels thinned their stocks, especially in June.

“We estimate Q1FY18E volume growth to be impacted due to disruption ahead of GST for most companies in our coverage universe,” Amnish Aggarwal, an analyst at brokerage Prabhudas Lilladher, said in a 11 July note. “Ebitda is expected to increase by 7% even as margins decline by 44 bps (basis points) due to subdued volume growth and rising input costs.”

“The impact on wholesale and distributor inventory and long distribution chain will be known only in the coming few weeks,” Aggarwal said. “While large manufacturers are largely ready for the implementation, the readiness at the distributor, wholesaler and retailer level is still incomplete.”

However, following a subdued earnings in the quarter to March 2017, HUL is expected to have a better performance this time around, according to senior analysts at equities brokerage firm Dolat Capital Sachin Bobade. In Q4 of FY17, HUL reported a 4% growth in sales and volume, primarily because consumer spending was hit due to demonetisation.

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