Duty cuts, price hikes to aid consumer goods companies

Duty cuts, price hikes to aid consumer goods companies
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First Published: Mon, Apr 20 2009. 01 54 AM IST

Updated: Mon, Apr 20 2009. 01 55 AM IST
New Delhi: Despite a slowdown, companies in India making household and personal care products are likely to report healthy growth in the three months to March, aided mainly by duty cuts and price hikes, analysts said.
A Mint survey of five brokerages revealed that they expect these firms to post robust revenue and profit growth also because falling commodity prices, particularly crude oil, expanded margins and new product launches, increased advertising expenditure and promotional campaigns bolstered volumes.
Consumer product companies, which include Hindustan Unilever Ltd (HUL), ITC Ltd, Britannia Industries Ltd, Colgate-Palmolive (India) Ltd, Nestle India Ltd, Dabur India Ltd, Marico Industries Ltd and Godrej Consumer Products Ltd (GCPL), are likely to see growth in sales by 5.9-23.7%, and show profit growth of between 8.3% and 37.2%, data collated from the five brokerages indicate. This excludes Britannia, which they expect would report an 8.7% fall in profits.
Also See Healthy Forecast (PDF)
The five brokerages surveyed were India Infoline Ltd, DSP Merrill Lynch Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd and SBI Cap Securities Ltd.
In the March quarter, the government reduced factory gate duties by 8% to 14% for most consumer products. A report by Motilal Oswal said this meant up to about 4% reduction in retail prices. “Though most FMCG (fast moving consumer goods) companies have facilities in zero-excise zones, we estimate the benefit at 1-1.25% on the entire portfolio,” it said.
The final impact of the duty cut on prices would depend on the ratio of manufacturing in excise-free to excise-paying zones. While cigarettes (ITC), biscuits (Britannia, ITC) or ready-to-eat foods (HUL, Nestle, Britannia, ITC) will not avail any benefits as these products are either subject to specific duties or exempt from excise, firms such as GCPL, Marico and Dabur, with factories located in tax-free zones, will also not see significant excise duty savings. “Companies such as HUL, GSK (GlaxoSmithKline) Consumer, Colgate-Palmolive India and Nestle India have the highest excise duty outgo and stand to be key beneficiaries,” according to Angel Broking.
Falling raw material prices have benefited firms that make detergents, soaps, shampoos, toothpaste and skin care products. “GCPL and HUL stand to benefit the most due to high contribution of soaps (and) detergents to their revenue,” Angel Broking said.
Although some companies reduced ticket prices or increased quantities in the same products in the three months starting January, most of them had hiked retail prices in the preceding two quarters by 5% to 20%, which would reflect in their earning in the quarter gone by. This is likely to reflect in increased earnings.
“Over the past several quarters, most FMCG companies had resorted to judicious price hikes to protect their dwindling margins. However, as economic slowdown takes its toll on consumer spending, even as inflation declines, FMCG companies are tweaking their pricing strategy to retain consumers and safeguard their volume growth,” according to Angel Broking.
Although companies have benefited from duty cuts and reduced raw material prices, most have not cut prices. They instead spent more on advertising, promotions and product launches to drive up volumes, the brokerages said.
“The players are focusing on more lower price unit products, taking price cuts for driving volumes and are also offering freebies to gain market share. We believe, going forward, the revenue growth to be mostly volume driven and not price-driven,” India Infoline said.
However, the fall in rupee’s value against the US dollar is likely to moderate gains from decline in input prices, particularly for companies that use commodities such as palm oil, skimmed milk, barley and coffee, which are largely imported. “Rupee depreciation would limit gains from palm oil price reduction for HUL and GCPL. Nestle and Britannia would be adversely impacted due to rising sugar and wheat prices,” Motilal Oswal said.
In the stock markets, these consumer product firms registered signs of moderation after outperforming the benchmark index, Sensex, on the Bombay Stock Exchange (BSE) for several quarters.
“The BSE FMCG Index delivered a marginal outperformance of 182bp vis-à-vis Sensex led by mid-caps like GSK Consumer, Dabur and Colgate. Most FMCG stocks in our universe outperformed the Sensex except for GCPL, HUL and Asian Paints,” Angel Broking said.
A report by SBI Cap says HUL is likely to post a 10% jump in revenue at Rs4,178 crore, and 37.2% increase in its profit after tax at Rs522 crore, for the quarter ended March, as against the same period last year. But Angel Broking sees a 14.9% growth in sales at Rs4,359 crore and 19.3% rise in profit at Rs451.6 crore, and this growth, says the firm will be thanks to low commodity prices which impacted its soaps and detergents portfolio.
ITC is expected to register 5.9-15.2% increase in net sales and 11.2-12.8% growth in net profit. Angel Broking predicts a 2% volume decline during the quarter owing to its exit from non-filter cigarette segment and deliver only 5.9% revenue growth during the quarter due to slowdown in its hotels segment.
Britannia Industries (not tracked by Angel Broking and SBI Cap among the five firms polled), is likely to see de-growth of 8.7% in profits for the quarter at Rs56.9 crore and 21.4% increase in sales at Rs841 crore, according to Motilal Oswal. The company would be adversely impacted due to rising sugar and wheat prices, however, the resolution of the dispute between Wadia Group and Danone SA, and the completion of stake acquisition would be a major rerating trigger.
The brokerages estimate Colgate-Palmolive sales and profits to grow 13-15.5% and 12.4-31.6% in the stipulated quarter. “Higher tax rate pulls the forecast post tax profit growth to 12%,” says DSP Merrill.
In the case of Nestle, India Infoline predicts the maximum 20.8% growth in sales at Rs1,317 crore and 29.2% growth in net profit at Rs206 crore. “Nestle is likely to report 21% increase in revenue due to 22% increase in domestic sales,” says India Infoline report.
Home-grown company Dabur India is expected to post 17.2-19.2% growth in net sales and 10.6-16.4% growth in net profit. According to Motilal Oswal, the company’s “volume growth would sustain at 13% on the back of strong traction in hair care. Response to the new range of Gulabari has been encouraging while the relaunch of the Rs10 SKU (with toothbrush) has led to revival in Babool sales. Chyawanprash sales are likely to remain muted. However, Dabur’s retail venture, “newU”, is likely to end the year with a loss of Rs20 crore”.
In case of Marico Industries, the recent fall in copra and safflower oil prices by 15-20% owing to higher supply on account of flush season is likely to aid the company.
“Godrej Consumer (Products Ltd) is expected to post strong volume growth driven topline and sharp expansion in margins as benefit of lower cost raw material kicks in,” according to Merrill Lynch which has predicted maximum increase in both sales and profit among the five brokerages. The firm has predicted 20% increase in sales at Rs326 crore and 33.7% growth in net profit at Rs54 crore.
vijaya.r@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Mon, Apr 20 2009. 01 54 AM IST