FMCG cos likely to post lower volume growth

The rising tide of inflation is expected to hit consumer goods companies hard in the quarter ended September 30. Most are likely to report lower volume growth, in the region of about nine to 10 per cent, as opposed to the 14-15 per cent reported last year.

Price-led growth is likely to be in the region of five to six per cent, in line with what was reported last year. A key factor is the cautious policy adopted by most companies. While commodity inflation has been severe, firms have been judicious on price rises, to minimise the impact on volumes. "This is a strategy that most firms have been following in the past few quarters. Volume growth is something that most are keen not to touch," says Kaustubh Pawaskar, fast moving consumer goods analyst at Sharekhan, the Mumbai-based brokerage.

At a time when headline inflation, as measured by the wholesale price index, remains above nine per cent, a cautious approach to price rises is right, say executives of consumer product firms.
 

SECOND QUARTER ESTIMATES
Company	Net Sales		Net Profit
	Jun-Sep ‘12E (Rs cr)	Change (%)	Jun-Sep ‘12E (Rs cr)	Change (%)
HUL	5,345	14.2	599.4	14.0
ITC	5,948	17.5	1477.7	18.5
Marico	984	26.3	72.7	1.6
Nestle	1,928	17.8	263.1	20.4
Dabur	1,202	23.5	173.2	8.0
Colgate	625	13.2	107.5	7.2
GCPL	1,091	14.5	142.7	8.9
E: estimated                                                                           Source: Angel Broking

Marico, maker of popular oil brands such as Parachute and Saffola, is an instance. It said, last month: "We have recorded healthy volume growth, despite price hikes. This is a positive sign, indicating sustained demand and the underlying strength of our brands. Against this backdrop, we may not take any further increase in retail prices, as it may impact the volume growth numbers."

The update which preceded Marico's second quarter results also said it expected its profit after tax to fall short of current expectations on account of a number of reasons, including the general slowdown and high commodity costs, which had impacted margins.

The trend is likely to be no different with allied firms, as they sacrifice margins to maintain volume growth. Gross margins are likely to contract by 500-600 basis points (bps) in the second quarter, while operating margins are likely to go down by 100-200 bps, analysts tracking the sector said.

This could change in the third quarter, as the festive period induces consumers to loosen their purse strings. Analysts say volumes in the December quarter could improve on the back of stronger offtake of products. What could aid this is higher advertising and sales promotion expenditure for the quarter.