Price hike to aid Q2 FMCG sales; margin may remain stressed

ALSO READ News and Notices about HUL See interviews with HUL Management See what other Experts & Brokerages are saying about HUL See previous Results of HUL HUL BSE | NSE 31/05/12 Are Mutual Funds betting on HUL? Other Stocks in this news Tata Global Beverage | Dabur India | Asian Paints | Marico | GlaxoSmithKline Consumer Healthcare | Colgate Palmolive (India) | ITC | Bajaj Corp | Godrej Consumer Products | Britannia Industries | Pidilite Industries | United Spirits |

Moneycontrol Bureau

The FMCG sector has been a stellar performer amid the overall volatility on the street this year. But will the second quarter results lead to further outperformance or will the rally pause?

It has been a mixed bag for FMCG companies over the last few quarters. While most firms have reported double digit sales growth on the back good volumes, a rise in price of several key raw materials has kept margins under check. The second quarter is expected to be not much different.

Most consumer goods firms hiked product prices to offset high input costs. Hindustan Unilever 's Rin detergent, Pears soap and Clear shampoo, Dabur Amla and Vatika hair oil, Bajaj Almond Drops hair oil and Godrej No 1 soap among others saw price increases between 3-10% over June-August. This price hike will boost their top line.

Revenue of most FMCG companies is expected to rise in the 15-30% year-on-year range. Tata Global Beverages sales growth is likely to be slower at around 7-8%. But margins for most firms will still be bogged down by input costs. 

"With effective price increases and steady sales volume growth in most of the categories, we expect the top line growth of most of the FMCG companies to sustain in double digits in the second quarter...We expect the gross profit margin of almost all the FMCG companies to remain under pressure due to the high prices of inputs on a year-on-year basis during the quarter," brokerage Sharekhan said in a report.

Operating margin of Dabur India is likely to decline 189 bps, Asian Paints down 168 bps, Marico down 90 bps and GlaxoSmithKline Consumer and Colgate margins are seen down a little over 30 basis points in July-September, according to Angel Broking. 

Cigarettes to hotels to FMCG major ITC could be an exception though. Backed by a 7% volume growth in cigarettes and a 5% price hike, its margins could expand 115 bps, says Bank of America Merrill Lynch. Angel Broking expects ITC's operating margins will expand 60 bps.

Hair care company Bajaj Corp on Thursday saw its second quarter net profit rise 90% and net sales were up 31% from a year ago. But margins fell over 200 basis points year-on-year to 25.7% in July-September.

While the price hikes may enhance sales, some analysts feel it will lead to slower growth for some firms, compared to the first quarter.

"Price increases and a high base effect in categories like soaps, detergents, hair oils and Indian made foreign liquor are likely to subdue volume growth, resulting in slower volume growth for HUL, Marico and United Spirits compared with first quarter," said Amnish Aggarwal and Harit Kapoor of Motilal Oswal Securities.

There is some comfort though for FMCG firms, as price of some raw materials has either come down or their growth has slowed on a sequential basis.

For instance, copra price has declined 13% from its peak and PFAD (palm fatty acid distillate) is down 20% from its peak, although prices of both are still up year-on-year.

Aggarwal and Kapoor of Motilal Oswal expect price of agriculture inputs will remain high, but crude oil linked commodities will soften. They see improvement in gross margins for the FMCG sector from the fourth quarter (January-March).

So what's in store for investors? The CNX FMCG index is up near 10% so far this fiscal year, compared with a 13% decline in the broader Nifty index. But while the overall market remains volatile, it might not be prudent to put all eggs in the FMCG basket at current levels.

"Considering the current stretched valuation of the FMCG universe, we have become selective in the FMCG space and are focusing on the stocks that provide a decent upside and better earnings visibility over the next two years," said Sharekhan.

"With continued competition and margin pressure in the sector, we believe there is scope for valuations to come off their current levels (average P/E of 23x) given the growth prospects," said Motilal Oswal.

"While the long-term consumption story for the FMCG industry remains intact, any further re-rating from current valuations seems less likely given near-term concerns," said Angel Broking.

Angel is underweight on the FMCG sector and doesn't expect any positive trigger for the companies in the near-term. It advises investors "accumulate" Godrej Consumer Products , Dabur India and Britannia Industries . It has a "neutral" or "reduce" rating on most others in the FMCG space.

ITC and Godrej Consumer are among Sharekhan's top picks, while ITC and Pidilite Industries are top picks for Motilal Oswal.

Nachiket Kelkar
nachiket.kelkar@network18online.com