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Jul 12, 2012, 08.23 AM IST
Fast moving consumer goods companies are expected to report on average around 20% year-on-year sales growth in the Jan-March quarter, helped by some softening of input costs and price hikes.
Fast moving consumer goods companies are expected to report on average around 20% year-on-year sales growth in the Jan-March quarter, helped by some softening of input costs and price hikes. However, all eyes and ears will be on the companies' outlook for the rest of the year as there is a growing concern that a deficient monsoon season could hurt consumer demand.
The FMCG sector has been among the top performers for over a year now, given the steady growth despite the uncertainties in the broader markets. A strong show is expected from the companies in the quarter ended June 30th, as price increases taken in the quarter and previous quarters, lower cost of some inputs will boost value growth and new product launches, enhanced distribution drive volumes.
But will that sustain if monsoon rains are below normal this year is a big question. The total rainfall in June was 29% below the long period average. The late arrival of monsoon could hurt rural demand, which accounted for 35-50% of total sales last year, said Sanjay Manyal and Parineeta Poddar of ICICIdirect.com, the retail broking arm of ICICI Securities.
Apart from the rains, there is also a concern that the overall economic slowdown and high inflation could hurt consumers' discretionary spending.
"We believe that premium segment sales would not be impacted much, but could be down trading in the lower to mid price segment products," Manyal and Poddar said.
Other analysts voice similar concerns.
"Macro analysis clearly indicates stress and hints at multiple risks to sustenance of volume growth," said Emkay Global Financial Services.
Lower input costs to aid margins
Raw material prices saw a relentless rise in the last financial year, putting pressure on margins. Most companies passed on the commodity cost increases on to consumers. In April, ITC increased prices of its cigarettes to pass on the excise duty hikes in the Union Budget and during the quarter has also raised prices some of its Sunfeast biscuits.
But last quarter prices of several inputs declined, giving a fillip for consumer goods firms.
"During the quarter, prices of several raw materials such as wheat, barley, coffee, cocoa, palm oil, copra and soyabean declined on a year-on-year basis. This is expected to boost the gross margins of FMCG companies," said V Srinivasan of Angel Broking.
A fall in crude oil prices has also led to a decline in prices of crude-linked raw materials. However, due to the sharp rupee depreciation, gains here will be limited.
FMCG stocks have had a strong run for over one year as investors shifted to defensive bets amid the overall volatility in the market. The CNX FMCG index is up over 21% since July 2011, while the wider NIfty index is down over 5%.
However, most analysts have started questioning the high valuations that some of the FMCG stocks command. More over, given the cloudy outlook, any further re-rating is unlikely.
Tags: FMCG, earnings, results, consumer goods, Hindustan Unilever, HUL, Godrej Consumer, Marico, Nestle, GlaxoSmithKline Consumer, Dabur
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