Margin pressure to continue in FMCG sector: GEPL Capital

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Margin pressure to continue in FMCG sector: GEPL Capital

GEPL Capital has come out with its report on FMCG sector. As per research firm, the sector has posted strong double digit sales growth with most of the companies posting more than 15% growth.

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GEPL Capital has come out with its report on FMCG sector. As per research firm, the sector has posted strong double digit sales growth with most of the companies posting more than 15% growth.

Q1FY12 Earnings Review
"FMCG sector posted strong double digit sales growth, with most of the companies posting more than 15% growth except Jyothy Labs which posted sales de-growth owing to change in method of distribution. Growth was driven by healthy volume growth and price hikes taken by companies. Companies like GCPL (40%) and Marico (31%) posted strong sales growth pushed up by acquisitions. Companies with higher share from food categories (GSK Cons, Nestle and Britannia) have reported stronger sales growth against HPC major HUL. Companies posted strong volume growth except for HUL and Dabur . Volume growth revived for GCPL, GSK Cons , ITC and Marico when compared to Q4FY11. Colgate, GSK Consumer and Marico posted strong volume of 14% each during Q1FY12. Colgate posted stable volume growth, while Dabur and HUL witnessed decelerating volume growth.

With increasing raw material prices, gross margins continue to witness pressure despite price hikes taken by the companies. Prices of raw materials like Palm oil, Copra, LAB, HDPE and Milk continue to remain high. Companies took selective price hikes so as to protect volume growth. These price hikes were not enough to mitigate the impact of increase in raw material prices. Due to increase in RM cost, gross margins and consequently EBITDA and PAT margins contracted for the companies. Britannia, GCPL and Nestle managed with flat or marginal contraction in the margins, while Colgate and Jyothy Labs witnessed high margin EBITDA and PAT margin contraction. Companies realigned their ad spend to mitigate the impact of increasing raw material price. As the competitive intensity in the sector remained high, the moderated level of ad spends are not sustainable. Most of the companies have moderated ad spends from their peak (as a % of sales), while GCPL has increased the ad spends.

We believe FMCG sector will continue to witness robust growth driven by mix of volume growth and increase in realization in the coming quarters. We believe with easing raw material prices in the recent past, there would be some respite on gross margin front. Normal monsoon and lower food inflation are another welcome signs for the sector. Decrease in prices of agri-commodities would help food companies. However, if RM cost pressure continues, companies might resort to selective price hikes to mitigate the pressure. Competitive intensity in the sector continues to remain strong which will push the ad spends higher, which have moderated in the recent past. The stocks are trading near their peak valuations with limited upside opportunity. However our preferred pick is ITC with strong earning visibility with lower margin pressure," says GEPL Capital research report.

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To read the full report click on the attachment