Consumer goods companies are on a roll. Stock prices of most of these companies are heading north. The BSE FMCG index has risen nearly 12 per cent in the last three months and 7.5 per cent in the last month itself. Ever since the markets switched to a “risk-on” mode this year, the pundits started predicting a fall in stock prices of consumer goods companies. However, this has not happened yet, even though current levels seem to have priced in a good set of numbers in the fourth quarter.
Despite a sharp rise in input costs through the financial year, most companies are expected to post robust growth in revenues and profit in Q4 FY12. For starters, average revenue growth is estimated to be 20-22 per cent. However, sales growth could be led by price and not volumes, believe analysts. Due to high input costs and price rises undertaken by companies through the first three quarters, the volume growth has come off from double digits to single digit in FY12. ICICIDirect says the industry witnessed eight per cent volume growth in 2011, compared to 12 per cent a year ago.
Given that some commodity prices have cooled in the last quarter or so, analysts expect the sector to expand margins by as much as 80 basis points, the highest in several quarters. According to Religare Institutional Research, gross margins would expand year-on-year for most companies, on a low base and moderating input cost inflation. The brokerage expects a major improvement in operating profit margin of Marico, Nestle, Godrej Consumer, Jyothy Labs, Hindustan Unilever and ITC. However, Dabur, Colgate and Asian Paints could witness a decline in margins, compared to the previous year.
While the fourth quarter is expected to be good for most consumer goods companies, their performance in FY13 would largely depend on the quality of volume growth and trends in rural spending. Given that most companies have pruned advertising and promotional spends in the last nine months to hold on to margins, volumes are expected to be hurt in the coming months. From a stock-price perspective, analysts believe all the positives have been currently priced in, with little room for further uptick.