Volumes, margins to face more pressure; analysts expect price rises after monsoon.

As people rejoice over the news of a good monsoon season this year, the mood remains less celebratory among fast moving consumer goods companies (FMCG). Most of them are preoccupied with the strategy surrounding their pricing policy after the monsoon season.

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The last financial year was unique for most companies because most of them enjoyed good volume growth, as well as improvement in their margins. The two, according to analysts, rarely go hand in hand. “You either see volume growth on the back of price cuts or margin expansion on the back of price hikes,” says an FMCG analyst based in Mumbai.

Sunil Duggal, chief executive officer at Dabur India, says, “Price hikes are essentially a tool to protect margins. If there is no need for it, why should we do it?”

Last year’s buffer
What worked for companies in the last year, says Shirish Pardeshi, senior FMCG analyst at brokerage firm Anand Rathi, was low-priced inventory. This was thanks to lower input costs, especially in the first and second quarters, and intelligent forward contracts, which protected them from the volatility in commodity prices through the year. “This allowed them to take price cuts without hurting margins significantly,” he says.

This, despite the fact that advertising and sales promotion expenditure, as a proportion of total sales value, increased significantly through the year, from 10 per cent to 12.5 per cent, says Pardeshi.

For the fourth quarter of 2009-10, for instance, margins for most FMCG companies were up 200 basis points, he says. “For the full year, the trend was more or less the same, a 200-basis points increase, taking margins from 10 per cent to 12 per cent on an average,” he says.
 

Volume growth was predictably high last year as well, as in the fourth quarter, adds Pardeshi. “Over 11-12 per cent for the year and 15-16 per cent for the fourth quarter,” he says.

The challenge, therefore, for most FMCG companies will be to maintain this momentum of growth in the current year as well.

Is it possible? Opinions are mixed. While some analysts believe the accent will continue to be on volume-led growth, implying that price hikes will be slow to come, others feel price-led growth will return in the second half of the year.

“Companies have exhausted their low-priced inventory,” says Arnab Mitra, FMCG analyst at India Infoline. “Plus, their covers in terms of forward contracts are off. So, they now have higher-priced inventory to deal with. I don’t think they can stay away from doing price hikes for long. Post the monsoon season, there will be some pricing action.”

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