Indian consumer companies are expected to post a good performance in the March quarter. They have shifted from their earlier strategy of volume growth to driving sales growth through price hikes in 2011-12. Thus, price has had a bigger impact than volume on revenue during the year, and the March quarter is expected to be no different.
While that has been good for the companies, and the sector’s valuations, investors’ overriding concerns in 2012-13 should be the strain that price hikes may impose on consumer demand in a year of slower economic growth. In the past one year, the FMCG index of BSE has returned gains of 25.6% compared with an 11.8% decline in the broader market. That’s already a tough act to repeat in the current fiscal.
In the March quarter, revenue growth is estimated by brokerages to be in the range of 15-20% for the sector, while profit growth is expected to be 16-22%. That is good, but not great for a sector that is trading at a past 12-month price-to-earnings multiple of 34.4 times, according to FMCG index data. Some of the premium is attributable to the defensive nature of the sector, and the MNC (multinational company) premium given to some of its constituents, but it also reflects the growth expectations that have been built into stock prices.
This is where the concerns will begin to line up. Slower economic growth may not affect a person’s bathing habits and, therefore, may not translate into lower soap demand, but it can affect purchasing power. The increase in indirect taxes in the budget will see an increase in the overall costs for a consumer, and also that of consumer products. A combination of weaker economic fundamentals and rising product prices can trigger a switch to cheaper, local or even unbranded products, as has happened in the past.
A lot depends on how companies handle the situation. Faced with slower volume growth— some moderation is already visible in 2011-12—companies have a choice to make. They can keep prices constant or even take them higher to compensate for slower volume growth. And, they can then plough back profits into higher advertising budgets to spur growth.
Alternatively, they can use price cuts or volume discounts to ensure volume growth is either stable or even improves. This has proved to be a more sustainable growth strategy in the past.
A price-led growth strategy has invariably brought grief for companies, especially in a market where competition is rife, and Indian consumers have a keen sense of the price-value equation, which influences their purchase decisions.
The scope for an improvement in valuations seems relatively low at this moment. Investors should keep a close watch on demand, inflation and how flexible companies are with their pricing strategy to anticipate their fate in the current fiscal.
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