Strong sales, stable input costs to aid FMCG cos Q2 results
Most fast moving consumer goods companies are expected to report a steady double-digit revenue growth in the July-September quarter, with no signs of a slowdown, especially in the daily consumption products, while softer raw material prices will drive margins.
October 15, 2012 / 18:06 IST
Moneycontrol Bureau
Most fast moving consumer goods companies are expected to report a steady double-digit revenue growth in the July-September quarter, with no signs of a slowdown, especially in the daily consumption products, while softer raw material prices will drive margins.The slow start to the monsoon had raised concerns over demand for consumer goods, especially in rural markets. However, the rains picked up in August and that has somewhat eased those concerns.Both Sharekhan and Religare Institutional Research expect an average sales growth of around 15% year-on-year in the second quarter for consumer goods firms. ICICI Securities expects 18% revenue growth for FMCG firms. "Our interaction with the managements of the FMCG companies indicates that the consumer demand for value-for-money daily consumption items remained steady during the quarter. However, we believe that the premium and discretionary segments (including paints) would see some moderation in sales volume," said Sharekhan analyst Kaustubh Pawaskar.Gross margins are also likely to expand for most companies, given moderating input costs and lower advertising and promotional spends, last quarter.In July-September, prices of copra, used in coconut oils, declined over 30% (a boost for Marico), palm oil, used in soaps, saw prices decline 10% and price of mentha oil (benefits Emami) and linear alkyl benzene (LAB), used in detergents, was also lower.Sharekhan expects net profit on average to grow 18% for FMCG companies. Godrej Consumer Products and Marico are expected to lead with a profit growth of 38% and 21%, respectively.Some companies also took price hikes during the quarter, which should also drive margins, feel analysts."Q2 will see EBITDA margin expansion for all FMCG companies...We expect EBITDA (earnings before interest, taxes, depreciation and amortization) margin to expand by 147bps, supported by stable advertisement to sales ratio, operating leverage and cost-cutting initiatives," say Anand Mour and Gagan Borana of ICICI Securities.There were several new launches during the quarter. Marico started test marketing muesli, Godrej Consumer launched Aer air fresheners, launched shower gels under the revamped Cinthol range, Hindustan Unilever introduced the Tresemme hair care range among others.KEY THINGS TO WATCH OUT FOR-- Demand/volume growth in discretionary categories like paints, chocolates and noodles.
-- Sales growth/demand in rural areas.
-- Pricing actions during the quarter, especially in highly competitive categories like soaps and shampoos, detergents and biscuits.
-- Advertising and marketing spends.
-- Outlook on demand and input costs for the rest of the year.STOCK TALKSince June-end, FMCG stocks have continued to outperform the broader markets. The NSE FMCG index has gained near 16%, compared with a 7.5% rise in the wider NSE Nifty index. The FMCG index has outperformed the broader market for over a year now, and some analysts, like Varun Lohchab and Gaurang Kakkad of Religare Institutional Research, now advise investors book profit, especially in the large-caps, and buy again on dips."Given the strong outperformance of the sector in the last 6-12 months and post the recent run-up in FMCG stock prices, we see limited near-term upside from current levels," the two said.Sharekhan's Pawaskar also feels valuations are stretched at current levels. He has a "hold" rating on the FMCG stocks under his coverage. ITC and Godrej Consumer are among his prefered stocks.ICICI Securities advises a "strong buy" on cigarette makers ITC and VST Industries. The Religare analysts say their preferred picks are Hindustan Unilever and ITC among the large-caps and Emami and Dabur in mid-caps.
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