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Earnings Preview: FMCG sector

Earnings Preview: FMCG sector
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First Published: Wed, Apr 08 2009. 09 31 AM IST

Updated: Wed, Apr 08 2009. 09 31 AM IST
The first nine months of FY2009 saw steep price hikes across product categories by fast moving consumer goods (FMCG) players across the board due to continuously rising input costs.
Whereas the commodity prices reversed the trend since the later part of H2FY2009, the high cost of inventories prevented the immediate pass-on of the benefits to the consumers.
The last quarter also witnessed the beginning of price reductions / grammage increases / freebies being offered especially in the soap and detergent category.
The excise duty reduction from 14% to 8% as a part of the government’s fiscal stimulus also aided the price relaxations by FMCG companies.
However, as most of the companies have their manufacturing facilities in excise-free zones the benefit was limited.
Input cost
Raw material cost (except a few such as tea, coffee, sugar and wheat) for major product categories, from soaps and detergents to edible oils declined substantially.
Thus, one would expect significant benefits in the form of either margin improvements for FMCG companies or price reduction of end products.
However, for imported raw materials such as palm oil (average price down by a staggering 44.9% year-on-year in January-March 2009) and crude derivatives, the benefits would be pinned down to an extent by the depreciation of the rupee (as the rupee has depreciated by 26% y-o-y against the US Dollar in January-March 2009).
Volume growth
While the price hikes across FMCG products in the past year have protected the companies against a hit on their profit margins.
The impact of higher prices coupled with the macro slowdown has resulted in downtrading and lower volume growth for some companies.
Thus, while Hindustan Unilever Ltd (HUL)’s volumes in soap and detergent segment were hit hard, low-end products like Godrej No.1 and Ghadi detergent from companies like Godrej Consumer Products and Ghadi respectively saw a robust growth, pointing towards downtrading.
The same is noticed in the case of Saffola from Marico’s stable, whose volume growth has tapered substantially due to its higher premium to other edible oils.
Thus, we believe, going forward, volume growth will be the key focal point for FMCG companies across the board, especially in the wake of rational spending by consumers.
We remain confident that the FMCG market as a whole will continue its growth traction, however the performance of individual companies has to be keenly watched and will be dependent upon some critical factors.
Thus, for HUL, we believe the volume growth remains the key monitorable. For ITC, the performance of its non-cigarette FMCG business and taxation status of cigarettes in the budget that will be announced by the new government after the impeding Lok Sabha elections remain the key.
For Marico, it will be the volume growth in the domestic market and the overall performance of its international business, while for Tata Tea the surging prices of bulk tea (the raw material), its strategy to protect margins and achieve volume growth remain the key monitorable.
For Q4FY2009 we expect HUL, ITC and Marico to put up a good show on operational front.
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First Published: Wed, Apr 08 2009. 09 31 AM IST
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