Not much slowdown yet; FMCG Q3 sales to grow 18-20%

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Moneycontrol Bureau

An overall slowdown in the macro economy following a sharp rise in interest rates have led to concerns over growth and demand across several sectors in India. But there don't seem to be much pressures yet in the fast moving consumer goods sector.

Aalysts expect most FMCG companies in India will report a revenue growth of 18-20% from a year ago in the third quarter (Oct-Dec), on the back of steady uptick in volumes and price hikes taken across segments.

"Despite significant macro economic challenges, growth in the industry remained resilient during the quarter due to the inherent demand for FMCG products," Angel Broking said in its report.

Over the last one year, consumer goods companies battled a sharp rise in cost of key raw materials, which put pressure on margins. This time around though, operating margins at least, are expected to improve given that some input costs have started to ease sequentially and the firms also managed to pass on price hikes across many segments.

Hindustan Unilever , for instance, hiked price of some of its soaps in November-December.

Jyothy Laboratories , which makes the Ujala detergent, also raised product prices by about 5%. Cigarettes-to-hotels major ITC has hiked price of its Gold Flake cigarettes by as much as 15%, according to reports, in anticipation that government will likely raise excise on tobacco in the upcoming budget, according to reports.

JHS Svendgaard , a maker of private label products, and which counts companies like Dabur India, Cipla and Elder among its clients, told CNBC-TV18 recently that it too has negotiated price hikes with its customers to protect margins.

"Substantial price increases in brands has been key feature of fiscal 2012. Hence price increases alongside volume growth would translate into healthy revenue growth of 20% year-on-year," said Emkay Global Financial Services.
Varun Lohchab and Gaurang Kakkad of Religare Institutional Research expect average operating margins of FMCG companies they track will expand 50 basis points during the October-December quarter.

However, price of some raw materials like palm oil, although lower than its earlier peak, are still higher than a year ago, which will keep companies' gross margins in check. The recent sharp depreciation in the rupee, especially to the US dollar, has also come as a dampener for FMCG firms.

"For most FMCG companies, raw material cost denominated in foreign currency and crude-linked derivatives formed a significant portion of input costs," Angel Broking said.

Asian Paints, Colgate Palmolive, HUL, Marico and Godrej Consumer Products will be among the most impacted negatively, the brokerage feels. ITC, Dabur, Nestle India aand GlaxoSmithKline Consumer Healthcare will be less impacted it said.

Outlook

Analysts warn that there may not have been any significant downturn in the FMCG sector yet, and companies have been able to pass on price hikes easily, but signs of a slowdown are imminent.

Furthermore, there is heightened competition in some segments like soaps and detergents, which will limit the companies' ability to hikes prices going ahead.

"With constant price hikes, companies now face a risk of slowdown in volume growth and have limited scope for further price hikes due to rising competitive pressures in most categories, particularly home and personal care," said Angel Broking.

FMCG companies over the last few years have been focusing on expanding their rural reach, due to stronger growth in India's vast hinterlands due to rising farm incomes and government employment schemes.

But Emkay feels rural markets are likely to stutter going ahead, high prices finally beginning to catch up on discretionary spends. Urban markets are already showing some signs of moderation, it said. So risk to sustained volume growth has increased, it feels.
Stock view

FMCG stocks have been a star performer over the last one year, amid the overall market volatility.

The CNX FMCG index is up 11% since March 31 last year, while the wider NSE Nifty has declined near 19% over the same period.
But now analysts say many stocks are at high valuations and so only recommend investing in select stocks.

Angel Broking, for instance, has an "underweight" stance on the sector. It only advises "accumulate" for ITC, Dabur, Britannia, Godrej Consumer Products and Tata Global Beverages. It has a "neutral" rating on HUL, Asian Paints, Nestle, Marico and Colgate.

Religare says ITC and HUL are its top picks. However, risk-reward has now turned favourable for mid-caps like Marico, Britannia, GSK Consumer and Emami given the strong outperformance of large-cap stocks over the last six months.

Emkay has a "buy" on Nestle, GSK Consumer and Marico and an "avoid" on HUL, Colgate and Asian Paints.

Nachiket Kelkar
nachiket.kelkar@network18online.com