Fast-moving consumer goods: Chasing the monsoon
The FMCG sector’s sales grew 5.7% over a year ago in the March quarter, better than the 1.4% growth in the December quarter
The March quarter continued to be a tough one for fast-moving consumer goods (FMCG) firms as weak demand affected volume growth. However, the effect of a price deflation appears to be waning. The predictions of a normal monsoon have lifted investor spirits, too, although the benefits may come with a lag.
Market leader Hindustan Unilever Ltd’s volume growth fell to 4% in the March quarter, compared with the 6-7%-levels it managed in the preceding four quarters. Godrej Consumer Products Ltd said its volume grew 6%, compared with 9% in the preceding quarter; but if one included promotional offers, volume growth was flat at 9%.
The sector’s sales grew 5.7% over a year ago in the March quarter, better than the 1.4% growth in the December quarter. If this uptrend continues, it will be a good development for the sector. However, this may be due to inflation creeping back, especially as prices of inputs such as crude oil, palm oil and its derivatives and sugar have firmed up.
Input costs rose 2.9% from a year ago, compared with the preceding quarter’s 5.1% decline. That led to a sequential decline in the gross profit margin. If the sector’s operating profit still improved sequentially by 30 basis points, it was chiefly due to a lower increase in marketing and other expenses. Firms have reined in advertising costs during the quarter, apart from cutting other costs. One basis point is one-hundredth of a percentage point.
Net profit grew 8% from a year ago, which is better than the December quarter’s number but still low. Part of this low growth is due to firms losing area-based excise benefits, fully reflected during FY16. That effect will begin to taper in FY17. Still, the BSE FMCG Index has gained 9% from its level three months ago. The sharp jump in ITC Ltd’s share because of a smaller increase in excise duties is one reason. Another is a good monsoon forecast. Will get back pricing power, if demand recovers, in FY17. These can be game changers in the longer run.