For consumer companies, the good times haven’t ended-yet5 min read . Updated: 03 Nov 2008, 08:25 AM IST
For consumer companies, the good times haven’t ended-yet
For consumer companies, the good times haven’t ended-yet
Mumbai/New Delhi: What slowdown?
It’s a fair question to ask based on results for the consumer-product sector in the quarter ended 30 September. Unlike the companies in the benchmark Sensex and Nifty, which saw their worst performance in more than two years, the makers of items such as soap, snacks, colas, toothpaste and even durables such as televisions and washing machines recorded one of their most spectacular periods.
The results stand in contrast to anecdotal evidence and fears of a crisis in retail demand. Of course, the effects of more recent news—from hiring freezes to a downward spiralling stock market—will not be known until after the end of the current quarter in December.
But the behaviour of companies in the fast-moving consumer goods (FMCG) sector indicates that they believe good times might keep rolling. Many plan to go ahead with price hikes and new product launches.
Buoyed by such confidence that consumers will not hold back, soft-drinks maker Coca-Cola India increased prices of its various brands by about 10% just before Diwali. By tradition, companies offer various freebies to spur demand during the festive season. According to analysts who track the sector, companies such as Dabur India Ltd, Godrej Consumer Products Ltd, or GCPL, and Britannia Industries Ltd are contemplating another round of 5-8% price hikes to counter increasing input costs—up by 30%, by some estimates. “We had to take a price hike because of increase in direct and indirect input costs," said a Coca-Cola India spokesperson. On whether the price hike will impact sales, he said: “Coca-Cola India has grown in the past nine quarters and we hope the momentum to continue going forward."
At HUL, chairman Harish Manwani says growth didn’t come from price increases alone; volumes, which are a reflection on consumer demand, grew 7%. “Consumer spending remains robust in the FMCG sector... We have sustained volume growth in a high inflationary environment and have offset the cost impact through aggressive cost management and judicious pricing," he said, announcing the results.
Volume growth was seen across the premium and mass categories in the September quarter, he added.
Marico Ltd, maker of edible oil Saffola and hair oil Parachute, posted an 11.6% increase in net profit at Rs47.13 crore and a 30% increase in net income at Rs603.49 crore. Kolkata-based Emami Ltd’s net profit grew by 29.6% to touch Rs14.7 crore and net sales grew 21.6% to touch Rs127 crore during the second quarter of the current fiscal year.
Similarly, toothpaste maker Colgate-Palmolive (India) Ltd posted net profit growth of around 20% at Rs63.5 crore against Rs54.74 crore in the year-ago period. Food processing and dairy products company Nestle India Ltd reported a 13.5% and 22% increase in net profit and sales, respectively. For the nine months ended 30 September, Nestle’s net profit grew 29% to Rs412.99 crore, against the corresponding period a year ago.
“Despite the concern of a potential slowdown, we believe that India continues to have strong growth opportunities. We have kept consumer insights centre-stage... At the same time our ability to increase people engagement, with the combination of clear strategic direction and focus on execution, has certainly helped us to continue to deliver organic growth and margins," said Martial Rolland, chairman and managing director, Nestle India.
Industry players say the economic crisis will hit the demand for big-ticket products such as cars and houses, and consumers are less likely to alter their daily consumption habits unless they are hit directly. “Though the global economic crisis has eclipsed the Indian economy, I feel that this will not have a very serious impact on the FMCG sector, especially in case of those companies that are not in the premium segment," said Aditya V Agarwal, director, Emami Group. “Consumers might curtail consumption of high-end products but they will not cut back on the consumption of daily use products."
Analysts cite several reasons for the sustained consumer demand. According to a report by Mumbai-based brokerage firm Motilal Oswal, various recent initiatives announced by the government have augmented incomes across urban and rural households. The farming community has benefitted from the farm loan waiver and a sharp increase in the minimum support price of cash crops. The salaried class has gained due to the implementation of the government’s pay commission recommendations and rationalisation of tax slabs, the report said.
Another Mumbai-based brokerage, Angel Broking, whose clients include Marico, GCPL and Nestle, finds that despite price hikes, most FMCG companies have sustained steady volume growth because of low penetration levels across categories. “For the quarter, we expect our universe of stocks to register a robust 17% growth in topline," the report said. “The steady growth in topline will be aided by rising consumer spends, superior pricing power and better distribution reach. Even higher advertising spends, new product launches and increased level of promotions are expected to boost the growth in the second quarter."
Like FMCG companies, it’s been a good quarter for most consumer durable companies as well. Whirlpool India Ltd, for instance, posted net profit growth of 123% at Rs1.74 crore against a net loss of Rs7.56 crore in the corresponding quarter previous year. “Our successful product launches, expansion into new categories like water and built-in appliances together with the increase in pricing have contributed to our positive results," said Shantanu Das Gupta, vice-president (marketing), Whirlpool.
Companies said apart from new product launches, demand in the semi-urban segment along with the festival buying starting with Onam in the South, the Ganesh festival in the West and Diwali in the North helped in boosting sales.
R Zutshi, deputy managing director , Samsung India Electronics Ltd, said it saw nearly one-third growth in consumer electronics. “This was linked with our new product introductions, channel expansion in semi-urban markets, enhanced visibility and attractive finance offers that we have given in the market," he said.
Analysts say new product launches and unrelenting spends on advertising and marketing also helped consumer product companies in keeping their consumers engaged. Most FMCG companies upped their ad spends between 14% and 30% in the past two quarters.
The processed foods segment had several new launches during the quarter by companies such as Nestle, Marico, Britannia and HUL. Under the household care segment, Dabur took its hard surface cleaner Dazzl national while GCPL stretched its Ezee brand as a daily wash liquid detergent.
Dabur plans to launch Chawyan Junior and Gulabari skin care products nationally in the forthcoming quarter. HUL continues to focus on new foods segments.