The immediate lockdown of all business, companies and airlines in India since March 24 in the wake of rising COVID-19 cases, followed by the lockdown extension till May 3, is having widespread economic impact, with growth projections being reassessed downward. With 17,265 confirmed cases of COVID-19 in India and 543 deaths, the country is working to combat the disease and balance the economy. While most companies are expected to suffer a major impact from the on-going coronavirus crisis, the FMCG sector may see some benefits. 

Since the time lockdown has been announced, people are bulk purchasing daily use items in advance such as staples, soaps, toothpaste, milk, sanitizers and groceries. During this time, when many companies have completely shut down their production, the FMCG companies have been asked to ramp up production of these essentials.

Analysts at ICICI Direct note that "FMCG companies will post robust results in Q4FY20E due to stocking up of staples/groceries. Advance purchasing is expected to boost FMCG revenues by a good 10% during the quarter as people would buy additional 10 days of essentials." FMCG companies are also expected to maintain their elevated level of margins in FY21E.

Contrary to what most of the industries expect FMCG companies, specially those manufacturing essential items are expected to have a positive impact for the next two quarters. With advance purchases already done, FY21E would be revenue neutral as disposable income would shift from discretionary to staples categories. However, sales of certain non-essential items will face a slow down in this lockdown.

Nirmal Bang expects the FMCG sector to grow its topline by 3.3%, largely led by volume growth in the domestic business. Some key commodities which had seen sharp inflation until January 2020 have now witnessed some correction as per the trend in Q4FY20. The prices of these commodities still remain up on a YoY basis. Rest of the FMCG commodity basket has been benign. Less spends on advertisements and cost efficiencies are expected to support margins for the quarter.

Contrary to the reports published by ICICI Direct and Nirmal Bang, HDFC Securities expects COVID-19 to cause sharper impact on revenues for the companies in the fourth quarter as the lockdown has impacted transportation and channel filling opportunities for the quarter. Trade inventories have reduced for most categories. Lockdown of the last 12 days is expected to impact revenues by 13-15%.   

ICICI Direct and Nirmal Bang have revised their ratings on certain essential commodities producing companies:

• Hindustan Unilever Ltd: Most of the products of Hindustan Unilever (HUL) are essential items like soaps, detergents, toothpastes, tea/coffee whose demand is all-time high at present. ICICI Direct expects a per capita increase in its consumption on account of a sudden shift towards maintaining hygiene. HUL sales are likely to grow by 3.2% YoY, led by 4% growth in domestic volume, according to analysts. PATs are expected to grow at 14.8% YoY and 12.6% YoY. However, because of the recent hike in prices, there is little room for further growth because of which the brokerage firm has revised its rating from ‘buy’ to ‘hold’ while Nirmal Bang has issued a ‘buy’ call with a target price of Rs 2,600.

• Dabur India: As hair care, oral care and skin care are major products of Dabur India, the jump in demand of these products will strengthen the financials of the company. Its preservative food segments may witness lower growth due to shutting down of its manufacturing during lockdown period. ICICI Direct expects Dabur India to deliver 8.7% revenue CAGR and 10.6% PAT CAGR for FY19-22E and therefore maintains ‘buy’ recommendation with a target price of Rs 550. Nirmal Bang has also upgraded to ‘buy’ with a target price of Rs 520. Nirmal Bang expects Dabur to deliver Sales and EBITDA growth of 6.5% and 11.3% respectively and thus, building in 100bps YoY expansion in EBITDA margin. 

• Nestle India: All products of Nestle India are food items out of which 85% are staples and are experiencing continued demand. The 15% of the company which comprises chocolates, pasta and sauces are expected to witness a decline, being discretionary in nature. ICICI Direct has upgraded its recommendation from ‘hold’ to ‘buy’ with a target price of Rs 18,000.

• Marico: Parachute and Saffola edible oil forms two-third of sales for Marico. Stocking up of these products would help the company post positive results for the next two quarters. The strategies of the company may take two to three quarters to deliver, and Marico in a business note said that all other categories outside oil saw sales significantly hit in March. Analysts expect the company’s sales to decline 5.5% YoY and build EBITDA decline of 2.6% YoY.  

• ITC: ITC witnessed a significant correction of 30% in the recent market fall. The company might face an adverse impact for a quarter or two as there would be decline in cigarette sales in Q4FY20E and Q1FY21E due to non-availability. However, ITC many observe an improvement in the demand as most of its products are of daily use. 

• VST Industries: VST Industries is expected to be severely hit even beyond the lockdown period and the financials may face an impact for over the next two quarters due to non-availability of cigarettes. 

• Colgate Palmolive India: Colgate Palmolive India (CPIL) is expected to hugely benefit from the advance purchasing as all its revenue is from daily use items. ICICI Direct expects CPIL to post 10% volume growth in Q4FY20E followed by 6% volume growth each in FY20E and FY21E each and has hence changed recommendation from ‘hold’ to ‘buy’ with a target price of Rs 1,430. Nirmal Bang has also issued a ‘buy’ rating for the stock with a target price of Rs 1,470. It expects the company to deliver sales, EBITDA and Adj. PAT growth of 4.5%, 5.1% and 4.3% YoY. 

• Tata Consumer Products: The tea segment with 70% of Tata Consumer Products has witnessed an intensified surge in buying during the lockdown. The merged business of Tata Chemicals includes staples such as salt, pulses and spices which may witness strong demand in H1FY21. ICICI Direct maintains ‘buy’ recommendation with a revised target of Rs 375.

• Varun Beverages: The financials of Varun Beverages may be severely impacted after the closing of its manufacturing facilities of carbonated juices and energy drinks. Only bottled water may see a hike during this period. ICICI Direct has revised its revenue and earnings estimates for Q4FY20E and FY21E. However, because of stock price correction, the brokerage firm maintains a ‘buy’ call with a revised target of Rs 700.

• Jyothy Laboratories: As most of the categories of Jyothy Laboratories fall under essential items, the company might benefit in Q4FY20E to a larger extent. Around 40% of sales are from rural regions and therefore, without revival in rural demand, growth in FY21E can be a challenge for the company.