Q4 to set the trend for consumer products firms

Q4 to set the trend for consumer products firms
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First Published: Thu, Apr 08 2010. 09 45 PM IST

Updated: Thu, Apr 08 2010. 09 45 PM IST
In the March quarter, the performance of two large consumer products companies—ITC Ltd and Hindustan Unilever Ltd—will be closely watched. One has been slapped with a hefty increase in excise duties, which will reflect only partly in
this quarter’s performance. While investors are betting on its ability to pass on the costs to consumers without affecting demand, they will be looking for confirmation in its numbers too. The other is warding off competition from old foe Procter and Gamble Co. in its bread-and-butter categories. If that was not enough, it had earlier lowered product prices in segments such as soaps and detergents to remain competitive. While it’s a foregone conclusion that its sales growth and margins are both likely to get affected, by how much and whether it is regaining market share will determine how investors react to its results.
Graphic: Yogesh Kumar / Mint
The macro picture for the consumer non-durables sector is not encouraging, especially in the mass categories. On the positive side, good levels of gross domestic product growth and the government’s thrust on rural spending are positive factors. The March 2009 quarter had also seen destocking by trade and lower demand from modern trade, which has now recovered. So a small base effect will be visible in 2010.
But rising inflation, especially food inflation, appears to be eating into consumer wallets and is affecting demand. A year ago, companies had hiked prices in response to rising commodity prices and the willingness of the consumer to pay higher prices. Now, the market is flooded with price reductions, free volumes at the same price and other promotional offers. These are bound to have an effect on profitability, which will be visible in the current quarter.
The current quarter will also see the partial impact of the increase in excise duties in the Budget.
On the raw materials front, food-related raw material costs will be higher except for a few commodities such as coffee and edible oils. Sugar prices have come sharply off their peaks, though it may still be higher on a year-on-year basis. Crude-based raw materials will see a decline over last year. But operating costs such as freight and salaries will show inflationary trends. Investors will be watching what company managements have to say about the demand outlook for fiscal 2011, and their strategies to get growth back.
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First Published: Thu, Apr 08 2010. 09 45 PM IST