FMCG companies likely to post strong earnings4 min read . Updated: 09 Jan 2013, 10:07 PM IST
Analysts estimate profit growth of 15.8-18.3% and sales growth of 11-17.3 % for the companies
Mumbai: Consumer packaged goods companies are expected to post robust earnings growth in the quarter ended 31 December driven by margin expansion as demand for household essentials and sales of personal products rose because of the festive season and an early onset of winter.
A Mint survey of six brokerages—ICICI Securities Ltd, IDFC Securities Ltd, Bank of America Merrill Lynch, Edelweiss Securities Ltd, Religare Capital Markets and Angel Broking Ltd—showed that analysts estimate profit growth of 15.8-18.3% and sales growth of 11-17.3 %.
That’s in the face of weak sentiment that’s led to discretionary spending remaining subdued in some segments such as packaged foods.
“Consumer sentiments continue to remain weak due to low GDP growth and high inflation persisting in the country. Weak consumer sentiments were reflected in the modest volume growth posted by FMCG companies in the second quarter of financial year 2013," said a January preview report by Angel Broking.
Krishna Mohan, chief executive officer, sales, Emami Ltd, said, “In the previous quarter (July-September), we saw some slowing demand as to some extent there was monsoon pressure. These concerns remain to a certain extent."
“For us the winter quarter is very important and we are seeing stable demand," said Mohan.
“The demand side is holding up and there is positive sentiment especially in tier II, tier III and rural India," said Duggal.
While demand for winter products such as cold creams, hot beverages and chyawanprash has picked up, the third quarter of the fiscal is expected to have seen moderation in volume growth compared with the first half, said an earnings preview report by brokerage IDFC Securities.
That trend would be “more so in discretionary packaged food categories. Price increases and improvement in gross margins will drive a 16% operating profit growth for our universe", it said.
The brokerage expects Hindustan Unilever Ltd, the country’s largest consumer packaged company by revenue, to post an adjusted sales growth of 15% driven by 7% volume growth and 7-8% price increases. Meanwhile, companies introduced new products and entered new categories to keep volumes ticking in a muted macro-economic environment.
Hindustan Unilever launched Lux Body Sprays and ventured into the hair oil category with a super premium light hair oil known as Dove Elixir. Godrej Consumer Products Ltd (GCPL) launched new hair colour products and Dabur began selling air-freshening gels.
Companies also increased visibility across mass media to keep goods moving off shop shelves. For instance, Hindustan Unilever roped in Shah Rukh Khan and Katrina Kaif to endorse two new Lux soap variants and GCPL launched a television commercial for Aer air-freshening gels.
The increased spending on new launches and advertisements was offset by softening raw material prices.
“Benign raw material costs benefit was passed on to ad spends which remained high to back new launches. Innovation and research and development focus was the focal point," said an Edelweiss Securities December quarter preview report by analysts Abneesh Roy and Hemang Gandhi.
Raw material prices have seen a mixed trend though. The average price of agricultural commodities rose in the December quarter. Wheat and sugar prices rose 34.8% and 16.7%, respectively, from the year ago and are expected to have resulted in higher input costs for biscuit makers such as Britannia and ITC.
Domestic tea prices rose 21.7%. However, copra dropped 23.5% and palm oil 27.1%. The lower price of copra, from which coconut oil is extracted, is expected to result in a healthy operating margin for Marico. The reduction in palm oil prices is favourable for soap manufacturers such as Hindustan Unilever and GCPL, said the Angel Broking report cited earlier.
“We expect a modest increase in margins," said Duggal of Dabur, which benefited from falling hydrocarbon prices but saw an increase in agri-commodities. An ICICI Securities report expects Dabur to report operating profit margin expansion by 125 basis points in the third quarter of the fiscal year, after seven quarters of decline. One basis point is a hundredth of a percentage point.
During the quarter, the GSK group, the promoter of GSK Consumer Healthcare, decided to make a voluntary open offer to buy a 31.84% stake in the latter and increase its stake to 75% from the current 43%.
The Bombay Stock Exchange’s FMCG (fast-moving consumer goods) index rose nearly 7.71% in the December quarter, compared to an increase of 3.64% in the Sensex in the same period. The FMCG index was the third biggest sectoral gainer in 2012, rising 47% and ITC Ltd was among the top 10 performing stocks, rising 43.64% in the year.