Volumes to steer FMCG Q2 sales growth; margins drag

Volumes to steer FMCG Q2 sales growth; margins drag

Mumbai: Indian mid-cap consumer goods firms are expected to see a pick-up in topline growth in the September quarter on higher volumes as purchasing power returns with a good monsoon, but margins may still drag as input costs and brand-building expenses continue to mount.

A Reuters poll of 23 brokerages expects Britannia Industries to see sales rising 23%, Glaxosmithkline Consumer by 18%, Marico by 15%, Colgate Palmolive by 11%.

However, Godrej Consumer is seen staying ahead for yet another quarter with a 63% jump in net sales.

“Sales growth in this quarter will remain volume driven...Pricing power will be limited to some categories on the back of strong competition in the sector and hence growth in FY11 is likely to remain largely volume driven," said an analyst with Religare Securities.

“We are also anticipating a slight dip in operating margins led by a gross margin decline as input costs have inched up."

Food price inflation accelerated to 15.71% annually in September, pushing up input costs for FMCG firms.

Profit growth at most FMCG firms is expected to remain muted as price hikes by several firms during the quarter are less likely to result into any margin expansion, analysts said.

“While the last several quarters witnessed FMCG companies undertaking price cuts to battle competition, rising input cost pressures are pushing companies to re-work their pricing strategy by resorting to price hikes and grammage cuts," said Anand Shah, an analyst with Angel Broking Ltd.

“We believe the move will help protect margins, but incremental margin gains are less likely," he added.

According to the Reuters poll, Britannia and Tata Global Beverages are expected to see their quarterly profits fall by 12 and 65% respectively.

However, profits for others such as Colgate Palmolive are seen rising by 18%, GSK Consumer by 22% and Marico by 24%.

“For Marico, price hikes in Saffola and Parachute taken at the end of the first quarter are likely to lessen the impact of higher copra and palm oil prices," brokerage ICICI Direct said in an earnings report.

Godrej Consumer Leads

Godrej Consumer, which posted strong earnings growth for the past two quarters, is expected to outpace its peers.

“Godrej Consumer’s second quarter profit after tax is expected to grow 54% year-on-year due to strong growth in Godrej Home Care and full consolidation of recent acquisitions," brokerage Motilal Oswal said in a note.

Godrej has announced 5 acquisitions across personal care, household care and haircare since March in a bid to expand in Asia, Africa and Latin America, and all these deals were expected to be earnings accretive in FY11.

The firm also recently merged its unit Godrej Household Products with itself.

The poll saw Godrej posting a 41 percent rise in consolidated net profit on a 63% growth in net sales.

“The standalone business will get the benefit of price increases in hair dyes, but soaps are expected to be under pressure," the note added.