New Delhi: As price increases take a back seat, makers of personal and home care products are expected to post modest growth in both sales and net profit for the quarter ended June.
During the quarter, most companies cut prices in a move expected to hit their sales and profitability.
Also See Growth Curve (Graphics)
To minimize the impact, they relied on cost-management strategies such as tinkering with product size or weight, change in the product mix and better supply chain and distribution efforts to plug inefficiencies.
A Mint survey of five brokerages—India Infoline Ltd, DSP Merrill Lynch Ltd, ICICI Securities Ltd, Angel Broking Ltd and Citigroup Global Markets India Pvt. Ltd—shows that such efforts will help consumer products companies post decent results, but the growth will not be as impressive as it had been in the past several quarters.
Arguing that the impressive growth seen in previous quarters was because of steep price increases, a report by India Infoline says: “With the impact of year-on-year price increases tapering off in many categories, most companies are likely to report a moderation in revenue growth in first quarter of 2009-10.”
Because of a consistent rise in commodity prices and the rising inflation, most consumer goods companies had increased the prices of their products in 2008. This had helped them boost profitability.
But with the decline in inflation and commodity prices, most companies had to cut prices. Besides, the slowdown in the economy also hit consumer demand and price cuts were used by most companies to induce demand. These efforts will affect the value-led growth most companies saw in 2008, brokerage analysts say.
Sales and profit growth could be in a wide range. Top companies in the sector, including Hindustan Unilever Ltd (HUL), ITC Ltd, Britannia Industries Ltd, Nestle India Ltd, Dabur India Ltd, Marico Industries Ltd, Godrej Consumer Products Ltd (GCPL) and GlaxoSmithKline Consumer Healthcare India Ltd (GSKCH), are likely to see their sales and profits grow by 3% to 24.5% and 6.9% to 59%, respectively, the brokerages say.
A report by ICICI Securities says that the impact of price cuts is likely to get partly offset by the decline in commodity prices and some incentives announced by the government. This is expected to aid margin expansion.
“With softening of commodity prices and benefits of lower excise, we expect operating profit margin for the FMCG (fast moving consumer goods) universe to expand in Q1FY10. Hence, operating profit growth of 21.5% year-on-year would be much higher than sales growth.”
The report, however, adds that the quantum of margin expansion will vary across companies.
Analysts say the trend of price cuts and companies’ efforts to expand their volumes and market share are likely to continue over the next few quarters.
“Going ahead, most companies are likely to resort to three alternatives—enhance margins by maintaining prices, increase promotional activity and advertising spends while maintaining the price levels or resort to price cuts,” says a report by Angel Broking.
Low prices apart, rural demand is expected to boost volumes, say analysts.
While the sector is seeing volume growth of only 6-7% in the metros, in the rural markets sales are growing by at least 20%.
According to Merrill Lynch, the fastest growing companies in June quarter will be Godrej, Nestle and Colgate.
“We forecast June quarter profit growth of 19% led by sales growth. This is marginally better than the 17% profit growth in March quarter. The improvement is led by Nestle (higher margin), ITC (higher cigarettes margins, strong growth in paper and reduced FMCG losses), Asian Paints (improved volume and margins) and Godrej (margin expansion),” Merrill Lynch says in a report.
According to India Infoline, sector leader HUL is likely to report a recovery in volume growth, but decline in exports is likely to have dragged down overall sales growth.
ITC is expected to report growth in cigarette sales by volume after at least seven quarters of decline, owing to a favourable base and the absence of an excise duty increase this year.
According to estimates by Merrill Lynch, Godrej is expected to post an impressive 59% profit growth during the quarter on sharp margin expansion on lower input costs. Nestle is expected to post 19% sales growth and expand margins as costs remain benign for key materials such as coffee, wheat and vegetable oils.
Graphics by Sandeep Bhatnagar / Mint