FMCG Sector

Indian fast moving consumer goods (FMCG) companies are expected to report a slight reversal in trend during the June 2011 quarter, with moderation in sales growth and stable margins, thanks to price hikes.

Sales of 13 major companies in the sector, at Rs 24,163 crore, are expected to see a strong 17% year-on-year (y-o-y) growth in the June 2011 quarter (Q1FY12), though the growth rate would be lower compared to earlier quarters as price hikes (a wide range of 5-35%) affect the volume growth of companies such as Marico (coconut oil) and Godrej Consumer Products (soaps).

Sales Growth

The top five players (by expected sales in Q1FY12), including ITC, Hindustan Unilever (HUL), Asian Paints, Nestle India and Titan Industries that constitute nearly 70% of total revenues, are expected to report a sales growth of 15.4%.

ITC is expected to report a recovery in cigarettes’ volume growth (5-8%) in the absence of a price hike as excise duties were left unchanged in the Union Budget 2011-2012, strong traction in non-cigarettes FMCG business and a rebound in hotels business. HUL’s soaps and detergents will benefit from price hikes, while strong traction will continue in its personal care and foods business.

Asian Paints’ expected growth rate of 13% is disappointing compared to earlier quarters, given that the company had executed steep price hikes in past few quarters. However, Nestle and Titan are likely to continue their strong growth momentum, with 21% and 26% jump in revenues respectively, as they benefit from low penetration and strong demographics.

On the other hand, Godrej Consumer Products and Dabur are expected to record the highest growth of 46.5% and 28.4% respectively in this sector aided by the contribution of acquired companies. Tata Global Beverages, however, is expected to lag with a single-digit growth of 6.5%, followed by Colgate and GlaxoSmithKline Consumer Healthcare at 10-15%.

Margins

Most FMCG companies had been facing margin pressure since the past few quarters on the back of rising raw material prices and intense competition that limited price hikes that came in lower than escalation in costs.

However, the situation is expected to change in Q1FY12 as companies benefit from earlier price hikes and stable raw material prices. Also, companies resorted to a reduction in advertising expenditure (as percentage to sales) in order to compensate surge in raw material costs.

Consequently, the operating profit margin (OPM) is expected to remain intact at 19.5% (aggregate). However, excluding ITC, the OPM is likely to dip marginally by 17 basis points (bps), largely due to a 100bps fall in HUL’s OPM, followed by 91bps in case of Asian Paints. Net profit margin is expected to improve marginally by about 50 bps to 13.5%.

 
Double Bonanza


Going ahead, the FMCG companies will continue to ride on the consumption wave in India. Sales growth will remain robust, backed by strong volumes in rural areas, new launches, increased penetration of products (such as noodles and personal care) and inorganic opportunities.

Margins are expected to improve further due to recent price hikes, near normal monsoon resulting in benign agri-based input prices and softening crude oil based/linked commodity costs.

The prices of palm oil, sugar, wheat, LAB (linear alkyl benzene) and HDPE (High-Density Polyethylene) have already started softening. But many companies have shown reluctance in passing on the benefits of a reduction in input prices as they suffered in an inflationary environment.

Steep Valuation

The sector is trading at a peak valuation of around 29 times post the significant run-up in stock prices, outperformance over Sensex since March 2011 on expectations of good monsoons and softening trend in input costs. The BSE FMCG index touched an all-time high level of 4107 on July 8