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FMCG earnings under pressure, volumes to steer growth

FMCG earnings under pressure, volumes to steer growth
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First Published: Wed, Jan 19 2011. 05 17 PM IST
Updated: Wed, Jan 19 2011. 05 17 PM IST
Mumbai: Indian mid-cap consumer good firms are expected to see volume growth steer earnings in the December quarter, as margins remain under strain due to mounting input costs and rising competition erodes pricing power.
A Reuters poll of brokerages expects Britannia Industries sales to rise 30%, Glaxosmithkline Consumer 22%, Marico 18% and Colgate Palmolive by 16%.
However, Godrej Consumer is expected to continue outpacing peers with a 84% leap in sales in the quarter boosted by the consolidation of its recent acquisitions.
“Volume growth will be strong on the back of increased demand during the festive season ... rural demand will continue to outpace urban markets on rising MSP (minimum support price for crops), improved rural income and good monsoons,” Mehul Desai, an analyst with K.R. Choksey, said.
“But operating margins will remain under pressure as the raw material costs continue to remain high,” he added.
India’s headline inflation stood at an annual 8.43% in December, following a 7.48% rise in November, as food inflation hit a year-high this month before easing marginally to 16.91% last week.
Prices of key raw materials such as palm oil, milk, coffee, copra, safflower oil, titanium dioxide have risen in the past three months and will strain profit growth of many firms.
This, coupled with increased competition, will further weaken pricing power of consumer firms pumping up the pressure on margins. The Reuters poll expects Tata Global Beverages to post a loss of 17%, Colgate Palmolive to post loss of 7% while Marico’s bottomline to rise 11%.
“Marico is expected to be the worst affected as both copra and safflower oil, which are key raw materials for the company, have risen 30% q-o-q,” said an analyst with Prabhudas Lilladher. However, selective price hikes by some firms in the past months could make them better placed to absorb inflationary pressures.
Britannia is seen posting profits jump 38%, while Godrej 52% and GSK Consumer 86%, the poll estimated.
“In the previous 4-6 quarters significant price hikes were taken by companies such as Nestle and GSK Consumer, which would help margins recover on a sequential basis,” said an analyst with India Infoline.
With most companies reeling under the impact of high food inflation, a fresh round of price increases are expected to come through in the coming weeks, analysts said.
“Most of the companies are considering price hikes which will partially help mitigate the gross margin challenge in the fourth quarter,” said an earnings note by Ambit Capital.
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First Published: Wed, Jan 19 2011. 05 17 PM IST