We expect Q3FY2009 to be another quarter, when profit growth of fast moving consumer goods (FMCG) companies will lag far behind their sales growth.
The margins of FMCG companies have been under severe pressure over the past few quarters on account of inflation in commodity prices.
While FMCG industry showed its pricing power with a slew of price hikes over the past six months to protect profitability, the same has proved to be inadequate compared to cost increases, with a consequent squeeze in the margins.
In recent times, commodity prices have corrected sharply, which would ease margin pressures for FMCG companies.
We believe while FMCG companies will see a marginal benefit from the correction in the raw material prices in Q3FY2009, substantial margin benefits will kick in from Q4FY2009.
We believe hefty price increase in FMCG products, overall high level of inflation (which is now trending downwards) and a gloomy macro scenario in the private sector (that has led to an uncertain job market and lowering of employee confidence) are more likely to lead to decline in volume growth and down-trading across FMCG categories.
However, increase in salaries of government employees consequent to the implementation of the Sixth Pay Commission’s recommendations and buoyant rural incomes due to high commodity prices should provide support to volume growth in near term.
Thus we believe that in Q3FY2009 FMCG companies are likely to report lower volume growth compared to that in H1FY2009. Thus the top line growth will highly be a function of year-on-year (y-o-y) price increases.
Thus in the coming quarters (specifically in FY2010) we expect that though FMCG companies will register much lower top line growth in the absence of price increases, the bottom line growth will be driven by margin expansions.
We also expect FMCG companies to introduce measured price cuts/discounts to push volume growth going ahead by passing a portion of reduction in raw material costs to consumers. We remain optimistic about the prospects of the FMCG sector.