New Delhi: Slowing inflation and declining input costs are likely to boost profits at makers of personal and home care products in 2009, helping the industry weather any further decline in the pace of economic growth and consumer buying power.
Profit margins at companies including Hindustan Unilever Ltd (HUL), Dabur India Ltd, Marico Ltd and Colgate-Palmolive (India) Ltd are likely to widen after prices of key raw materials such as palm oil and petroleum-linked inputs fell by up to 70% from their peaks. Input costs are down by between 25% and 50% from their 2007 average prices.
Input costs dip: Big Bazaar store at the Great Indian Place Mall in Noida, Uttar Pradesh. Harikrishna Katragadda / Mint
“Home and personal care companies such as HUL, Dabur, Colgate and Marico could see significant margin expansion, if the product prices are held at the present levels,” online brokerage India Infoline Ltd said in a recent report.
Consumer and home care products such as soaps and toothpastes have a reputation of being recession-proof, and the sector weathered the 2008 downturn in the economy better than makers of durables such as automobiles. According to the Federation of Indian Chambers of Commerce and Industry (Ficci), the consumer goods industry is expected to grow 16% to Rs 95,150 crore in fiscal 2009, up from Rs 85,470 core in the last fiscal.
“The sector has so far managed to stay away from the impact of the downturn as most of the items are non-discretionary in nature and are relatively insulated,” said Ashish Nanda, partner (retail and consumer products) at consultancy Ernst and Young India Ltd. A government move to reduce excise duty by 4% will provide an additional boost, and may spur companies to offer freebies and discounts to consumers even if they do not lower prices.
Makers of consumer products took a hit from rising input costs in the first eight months of the year—inflation paced by crude oil and commodity prices rose to a 16-year high of 12.91% in August before dipping to 6.61% in December—but still escaped the brunt of the 2008 downturn in a testament to the industry’s resilience to economic cycles.
According to research firm AC Nielsen, the FMCG industry clocked average growth of over 17 % in the first half of the current fiscal.
Most firms raised product prices by between 5% and 15% and resorted to cost cuts to combat the increase in raw material prices in the first two quarters. HUL raised prices of some brands by 10% and Emami Ltd products became dearer by 10-15%. Marico Ltd raised prices of its flagship hair oil brand Parachute by about 10%.
Britannia Industries Ltd effected a price increase of up to 7% and Colgate-Palmolive and Dabur by 5 %. Prices of products such as soaps, detergents, sunflower oil, coffee and dairy products rose the steepest.