Mumbai: Consumer goods companies are likely to report a drop in March quarter sales growth as demand for products remained subdued because of a weak economy, even as operating margins are forecast to expand because of lower input costs.
Analysts estimate a 13-15% sales growth and 12-18% profit growth for the sector, according to a Mint survey of reports by five brokerages—Religare Capital Markets Ltd, Edelweiss Securities Ltd, Motilal Oswal Financial Services Ltd, Nomura Financial Advisory and Securities (India) Pvt. Ltd and Emkay Global Financial Services Ltd.
“Volume growth moderation is likely to persist even in Q4FY13 (fourth quarter ended 31 March). With price-led growth waning, the revenue and earnings growth momentum (15% expected for the fourth quarter of the fiscal versus 18% for the third quarter of financial year 2013) should moderate as well,” Emkay Global Financial Services said in an earnings preview report released on 5 April.
Slowing consumer demand will affect volume growth of companies such as Hindustan Unilever Ltd, Marico Ltd and Colgate-Palmolive (India) Ltd, brokerage Motilal Oswal Securities Ltd said in its India Strategy report released this month.
“There have been offtake issues during the March quarter due to inflation and high prices, causing consumers to reduce their spends,” said Parag Desai, executive director, Wagh Bakri Tea Group, adding the trend was more prominent in the mass market categories.
“The pressures of inflation remain,” said Lalit Malik, chief financial officer, Dabur India Ltd, the maker of Real juice and Vatika shampoo and hair oil, while dismissing any impact on the company’s performance. “We have implemented a programme to improve efficiencies and this has helped it to get some growth.”
However, soaps and shampoo manufacturers benefited since raw material prices of palm oil, mentha oil and titanium dioxide fell 28%, 23% and 22% from a year earlier, respectively, according to a 3 April Edelweiss Securities report.
“The operating margin for our consumer universe is likely to increase by 50 basis points (one basis point is one-hundredth of a percentage point) y-o-y, given soft input prices and moderate advertising and promotion spends. Gross margins would expand y-o-y for most companies on a low base and moderating input-cost inflation,” Religare Capital Markets said in a 4 April report.
To be sure, companies have taken steps to address the slowing volume growth with an increase in advertising and promotion spends. “However, the impact on the results may not be immediately visible and the fourth quarter of the financial year 2013 volume growth trend could continue to be soft,” Nomura Financial Advisory and Securities (India) said in its April report.
Companies also refrained from raising prices in the quarter ended 31 March and stepped up spending on advertising and promotion, impacting price-led growth.
Hindustan Unilever, India’s largest consumer packaged goods company, launched Lakme Fruit Clean Up, Ponds Anti Tan Scrub, Axe Apollo and Dove Split Ends during the quarter besides running promotions on some of its popular soap and shampoo brands.
“The company (Hindustan Unilever) has initiated price cuts and promotions in the soaps and detergents segment. But it is unlikely to have a significant impact on fourth quarter results,” said Nomura in its report.
During the reporting quarter, Godrej Consumer Products Ltd introduced Hit anti-roach gel; GlaxoSmithKline Consumer Healthcare Ltd launched Parodontax.
The Union budget, too, “was marginally negative for the consumer packaged goods sector”, said the Motilal Oswal report, noting that while excise duty on cigarettes was hiked by 18%, surcharge on income tax was doubled from 5% to 10% “resulting in 1-2% earnings downgrade for the sector”.
Meanwhile, “the slowdown in the discretionary food and personal care (segment) is likely to continue in the first half of the new fiscal year as well”, said Abneesh Roy, associate director of institutional equities research at Edelweiss Securities. He added the critical thing to look out for is a good monsoon for the sector.
The BSE’s FMCG (fast-moving consumer goods) index rose 0.05% in the March quarter, outperforming the BSE Sensex which fell 3.04% in the same period. The FMCG index was the biggest sectoral gainer in fiscal 2013, rising 31.7%.