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Revenue rise expected as margin pressure remains

Revenue rise expected as margin pressure remains
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First Published: Thu, Oct 13 2011. 10 26 PM IST

Photo by Pradeep Gaur, Graphic by Yogesh Kumar/Mint
Photo by Pradeep Gaur, Graphic by Yogesh Kumar/Mint
Updated: Thu, Oct 13 2011. 10 26 PM IST
Mumbai: Consumer packaged goods companies are expected to post impressive earnings growth in the quarter ended 30 September driven by higher revenue on the back of modest volume growth and price increases.
Photo by Pradeep Gaur, Graphic by Yogesh Kumar/Mint
A Mint survey of six brokerages—ICICI Securities Ltd, IDFC Securities Ltd, Kotak Institutional Equities, Motilal Oswal Financial Services Ltd, Prabhudas Lilladher Pvt. Ltd and Sharekhan Ltd—shows that analysts estimate profit growth of 7-17% and sales growth of 15-20%.
Margins, though, will continue to remain under pressure. While the average price of key inputs saw a sequential dip in the quarter, prices of most commodities were still higher over the year-ago period. For instance, the price of palm oil—a key input for Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL)—was higher by 15% year-on-year (y-o-y). The price of copra, the key input for Marico Ltd was higher by over 50% y-o-y, according to a 7 October report by Sharekhan.
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“We expect the growth during the quarter to be a healthy mix of volume and value. In fact, we have chosen to focus on top line growth, even if it were to come at the cost of margins,” said Milind Sarwate, group chief financial officer and chief human resources officer, Marico Ltd.
To offset the pressure on margins, companies hiked prices, reduced advertisement expenses and cut operational expenses. “Hence, we expect margins to witness a slight respite in the quarter ending September on a quarter-on-quarter basis but remain pressurized on a y-o-y basis,” said a 5 October ICICI Securities report.
However, it may not be easy for all companies to keep hiking prices or bring down advertising expenses any further given the intensifying competition and worries about discretionary spending in a slowing economy, analysts said.
Colgate Palmolive Ltd, for instance, has adopted an aggressive pricing strategy to take on competition from HUL and Dabur. The toothpaste maker is also engaged in an advertising war, with its Colgate Sensitive Pro Relief pitched against GlaxoSmithKline Consumer Healthcare Ltd’s Sensodyne.
Aggressive pricing and the advertising war will act as a drag on the earnings growth of Colgate Palmolive, a 4 October report by Motilal Oswal said. “This also shows a glimpse of the competitive intensity and its impact if Procter and Gamble enters the mainstream toothpaste market,” the report said.
Motilal Oswal expects ITC Ltd to post 17% sales growth, driven by a 7% volume growth in cigarettes, and 20% net profit growth. HUL’s sales are likely to grow 14% with Ebitda (earnings before interest, taxes, depreciation and amortization) margin expansion of 30 basis points to 13.9%. It’s net profit is expected to grow by 13.1%. One basis point is one hundredth of a percentage point.
Marico is expected to report sales growth of 24% y-o-y, driven by price hikes of key products Parachute and Saffola, and profit growth of 12.5%, according to a 5 October Kotak Institutional Equities report.
The stock market has already factored a robust earnings season into share prices, analysts said.
The FMCG index has risen 7% so far this year as the benchmark equity index, the Sensex, has dropped 20% in the same period. At 26 times estimated earnings, the FMCG index is trading above its five-year historical price-earnings average of 23. For the quarter ended 30 September, the FMCG index fell 3.34%, compared to decline of 12.69% in the Sensex in the same period.
With price increases looking difficult, the outlook for consumer goods makers will depend on volume growth prospects and input costs, analysts said.
“Any guidance that companies provide on volume growth and commodity costs will be keenly watched,” wrote Prabhat Awasthi and Nipun Prem of Nomura Financial Advisory and Securities (India) Pvt. Ltd in a 10 October note to clients.
“The December quarter will be better as the trends are positive and demand is good,” said Ullas Kamath, deputy managing director, Jyothy Laboratories Ltd, the maker of fabric whitener Ujala.
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First Published: Thu, Oct 13 2011. 10 26 PM IST
More Topics: Consumer Goods | Earnings | HUL | GCPL | Marico |