Result Review: FMCG sector

Result Review: FMCG sector

Our universe of 9 companies registered a healthy 19.3% y-o-y growth in revenues at Rs122 billion during Q2FY09 led by strong volume growth across segments. Categories like biscuits, cigarettes, toothpastes and soaps witnessed strong growth during the quarter.

Sector heavyweight ITC (48.1% weight in BSE FMCG index) recorded 15% y-o-y growth in revenues at Rs37.6 billion (slightly below our expectations) driven by strong ~11% y-o-y growth in core cigarettes (~2% decline in volumes) segment.

The other FMCG major Hindustan Unilever (28.7% weight in BSE FMCG index) recorded 19.7% y-o-y growth in revenues at Rs40.3 billion led by an impressive 7% underlying volume growth during the quarter.

Sharp rise in raw material cost put pressure on operating margins resulting in a mere 5.7% y-o-y growth in operating profit at Rs22.2 billion. Increase in adspend added further pressure on margins. As a result, aggregate sector operating margins declined by 230bps to 18.2%.


Among all the companies, Godrej Consumer witnessed a sharp 680bps decline in margins due to higher channel inventory built-up in Q1FY09.

The players have implemented various options like price hikes, cost saving techniques like reducing the packaging size, change in product mix and better sourcing of raw materials to mitigate the input cost impact.

The recent correction in some of the key raw material prices over the past one-month is expected to provide some respite to margins.

However, expectations of firm agri-based commodity prices will continue to put pressure on margins of food companies like GlaxoSmithKline Consumer, Britannia and Nestle in the coming quarters.

Aggregate sector net profit grew 6.5% y-o-y to Rs17.4 billion during the quarter. The growth was lower primarily on account of increase in operating costs due to input cost pressure.

All the companies in our universe, except Godrej Consumer reported net profit growth in the range of 4-16%. Colgate and Britannia reported healthy double-digit growth in net profit.

ITC could have recorded better growth but for the sharp rise in operating costs and increased losses from the FMCG-Others segment.

We continue to remain positive on the sector with ITC and Marico as our top picks.