Sector outperforms India Inc with 16.6 per cent rise in net

Fast moving consumer goods (FMCG) companies have put up a good show in the first quarter ended June 2009, driven by volume growth and a decline in commodity prices.

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On the profit front, the sector has outperformed India Inc with a 16.6 per cent rise in net profit, driven by a healthy rise of 354 basis points in operating margins.

Except Hindustan Unilever, which reported a 2.7 per cent drop in profit, all other FMCG companies selling personal care products, food products, soaps & detergents, oil, shampoos and skin care have reported a double-digit growth in net profit. The costs of raw materials to sales ratio, which declined 286 basis points, has contributed to the net profit of FMCG companies.

Most companies saw a good margin expansion in the June quarter. With raw material prices dipping to all-time lows around March 2009 due to the effects of the global meltdown, most FMCG companies selling personal care, skin care and food products reported an increase of 200-600 basis points in operating margins.

New product launches, announced by most players to regain the market share lost in the previous two quarters, have resulted in an ad spend increase of 24.2 per cent. In fact, Dabur, GSK Consumer, Godrej Consumer and Marico spent more than the industry average.

Going forward, according to a survey conducted by Morgan Stanley Research, FMCG companies expect a rise in inflationary pressures and moderate impact on demand due to deficient monsoons. Most FMCG companies, except Hindustan Unilever, have been seeing stronger growth in rural markets than in urban markets over the last 12 months. The revenue growth, which is projected at 11.4 per cent for 2010 and 12 per cent for 2011, is expected to slow down to around 10 per cent as companies could cut product prices to maintain volume growth.

Hindustan Unilever recorded a 7.8 per cent rise in net sales with home and personal care business (up 11.3 per cent) and personal products (up 14.7 per cent). Both these businesses were major growth drivers. In addition, lower input costs and cost management led to higher operating margins, which grew 237 basis points compared with a decline of 100-250 basis points in previous three quarters.

Cigarettes giant ITC reported a single-digit rise in net sales, while net profit increased 17.4 per cent as operating margins improved by 337 basis points due to savings on cost of raw materials. Nestle India reported a 16.8 per cent rise in net sales, led by strong domestic demand. Exports remained subdued — down 13.5 during the quarter. Nestle offset its cost inflation in milk and sugar through improved realisations and process efficiencies, which resulted in margin expansion. The company’s operating margins were up 175 basis points, despite higher employee cost and commodity prices.

Godrej Consumer Products reported a 20.4 per cent growth in sales, driven by a 21.5 per cent rise in the domestic business. Operating profit margins increased by 734 basis points, which led to a sharp 75.88 per cent rise in net profit.

During the latest quarter, copra prices were down 19 per cent and safflower prices down 14 per cent from March 2009 levels. This contributed to the strong growth that Marico saw in its sales and profit.

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