Festive demand, benign input costs to boost FMCG Cos in Q3
Fast moving consumer goods majors in India are expected to report strong double-digit earnings growth in Oct-Dec, helped by helped by a surge in demand during the festivals, price hikes taken by some companies during the quarter and decline in cost of several raw materials.
January 14, 2013 / 08:16 IST
Moneycontrol Bureau
Fast moving consumer goods majors in India are expected to report strong double-digit earnings growth in Oct-Dec, helped by a surge in demand during the festivals, price hikes taken by some companies during the quarter and decline in cost of several raw materials. "We expect another solid quarter of earnings performance for Q3 with sector average net sales growth of 17.7 percent year-on-year and margins moving up by 55 bps. Consequently, we expect PAT (profit after tax) growth of 21% YoY," said Manish Jain and Anup Sudhendranath of Nomura Financial Advisory and Securities India.While some companies continued to hike prices in the quarter, the growth will be predominantly led by volumes, helped by new product launches and advertising spends.Several companies launched new and others re-launched products in the existing categories. For instance, Hindustan Unilever launched Lux Body Sprays and super premium light hair oil Dove Elixir and Godrej launched creme hair colour. Firms also increased advertising and promotional spends to keep volumes ticking, like Shahrukh Khan and Katrina Kaif were roped in to endorse two new Lux soap variants by HUL, Godrej launched TV commercials for its new Aer freshners. Abneesh Roy and Hemang Gandhi of Edelweiss Securities say that these initiatives will help FMCG firms clock robust sales growth. They are expecting 16-18 percent sales growth for most consumer goods firms, except HUL and Nestle India, which are likely to see lower growth rates of 10 percent and 9 percent respectively. Godrej Consumer will continue grow faster at 26 percent.Godrej Consumer continues to be boosted by acquisitions, and consistent price hikes, premium product launches in its portfolio will drive strong growth for Colgate Palmolive. The integration of Paras Pharma's personal care products portfolio, which includes the Set Wet brand of deos, and steady growth and expansion of the Parachute brand should benefit Marico.However, ITC will continue to see flat growth in cigarette volumes, given the price increases and duty hikes taken during the year. HUL's volume growth could be restricted to 6-7 percent due to continued pressure on discretionary items in food and personal care.Nestle India has already been facing pressure on volumes due to consistent price hikes over last several quarters. Many analysts say volume growth in Oct-Dec, its fourth quarter, will also be sluggish, although margins are expected to get a boost as prices of some raw materials like coffee, skimmed milk powder and edible oil have declined in recent months.Higher depreciation, interest costs will also lead to a muted quarter for Nestle India, says Anand Shah of Elara Securities."We model 17.8 percent YoY growth in our FMCG universe, driven by across the board gross margin expansion, aided by benign input cost environment especially in inputs like palm oil, PFAD (palm fatty acid distillate), coffee, milk and LLP (light liquid paraffin)," Shah said.However, higher prices of wheat and sugar could increase raw material costs for biscuit makers like Britannia and ITC.STOCK WATCHConsumer goods stocks have had a strong run over the last one year, with many hitting new highs in the last couple of months, as investors bet big on the defensive sector, even as several reform measures announced by the government pushed up the broader markets. Analysts recommend selective buying in FMCG stocks, given that valuations of many stocks are at a record high.ITC, Emami, Godrej Consumer and Dabur are Edelweiss' top picks for now. Nomura recommends a "buy" on GSK Consumer, Jubilant Foodworks, Godrej, Dabur, Emami and ITC. Elara has a "buy" on Dabur and Marico and "accumulate" on ITC. Nomura and Edelweiss have a "neutral" and "hold" rating respectively on HUL. Elara recommends investors "reduce" HUL shares.So far this financial year, the CNX FMCG index is up 28 percent, compared with 12 percent rise in the wider Nifty index. But since Sep 30, the FMCG index has underperformed (up 3.2 percent) the Nifty (up 4.3 percent), a sign, perhaps, that the long run of consumer goods stocks may be coming to an end. Nachiket Kelkar
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