Mumbai: Improved profit margins at consumer packaged goods companies in the three months ended 31 March, coupled with hopes of a good monsoon and softening commodity prices, could see the sector increase its advertising expenditure in the pursuit of volume growth.
The combined net profit of the top 10 listed consumer goods companies increased 17.74% in the January-March quarter, according to a Mint analysis. However, this was lower than the 20.7% rise posted in the year-ago period.
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Similarly, while the combined revenue of the top 10 consumer packaged goods companies in the FMCG index increased 17.1% in the January-March quarter, it was lower than the 18.3% rise recorded a year earlier.
However, as companies increased prices and cut expenses, the operating profit margin—a measure of operating efficiency—rose to 21.1% from 20.6% a year earlier.
“Gross margin pressure likely peaked out. The coming quarters are likely to see expansion in gross margins, part of which will be ploughed back into ad spends,” noted a May 2012 Edelweiss Securities Ltd sector report.
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The trend began during Q4 as companies such as Marico Ltd, maker of Parachute and Saffola oil, and Godrej Consumer Products Ltd (GCPL), maker of Cinthol soaps and Hit insecticides, started putting back the gains in advertising and promotion (A&P) spends, said the same Edelweiss Securities report.
For instance, Marico had a gross margin jump of 443 basis points (bps) from the year ago that went into increased A&P expenses, largely due to new product launches. Godrej Consumer’s A&P expenditure in the fourth quarter surged 86 bps primarily to aid new launches. One basis point is one-hundredth of a percentage point.
Price increases aided this trend. Companies such as Colgate-Palmolive (India) Ltd raised prices by 6-13% across key toothpaste brands such as Gel, Sensitive, and Active Salt.
Emami effected price increases in the 6-9% range across key brands such as Navratna and Fair & Handsome over the past two months.
Similarly, The Procter and Gamble Co.’s Indian units increased the prices for some Oral B toothbrush products by 6-8%, according to a JP Morgan 12 May report.
“The fourth quarter has seen our margins improve as the price increases taken over a period of time have now mitigated the rise in input costs to some extent,” said N.H. Bhansali, chief finance officer at Emami, which also makes products such as Sona Chandi Chyawanprash and Boroplus.
However, the cost of inputs also increased in the January-March quarter.
Crude oil prices increased 15.2% from the year, palm oil rose 7.3%, domestic wheat rose 6.53%, and sugar was marginally down 2.26%, according to Bloomberg data.
Consumer goods companies are now banking on a good monsoon.
“Commodity prices are likely to soften in the coming months, which will put more money in our hands. This could facilitate an increase in advertising and promotion spends,” said Sunil Duggal, chief executive officer, Dabur India Ltd, maker of Vatika oil and Real juice.
More than the overall economic slowdown, Duggal is more focused on the monsoon.
India’s farmers depend on the June-September rainy season for the bulk of their irrigation.
“We sell day-to-day products; and with good monsoons, there will be money in the hands of the masses who buy our products, irrespective of the economic growth rate of the country slowing down,” said Bhansali of Emami while explaining that economic gloom doesn’t affect the sector as much as the monsoon.
Graphic by Naveen Kumar Saini/Mint