FMCG cos may not enjoy better margins this quarter

Margins hemmed by falling rupee, pressure to hold prices.

Fast moving consumer goods (FMCG) companies, which were expecting better operating margins due to falling commodity and crude oil prices, may not see significant improvement in the just-concluded quarter (January-March 31).

The decline in commodity and crude oil prices was expected to benefit FMCG firms like Hindustan Unilever (HUL), Godrej Consumer Products (GCPL), Dabur, Emami and Marico. For instance, in March, palm oil was priced almost 40 per cent less than its all-time high last year. Likewise, crude oil has dropped over 65 per cent from its high in July 2008. Crude oil prices have been rising in the past 10 trading sessions but that will not be a cause for concern for FMCG companies in the January-March 2009 quarter. Analysts say the companies will have sufficent low-cost inventories for the current month.

However, the impact on margins will be on account of the depreciation of the rupee, falling prices and the low inflation rate that has not made essential purchases cheaper. Says Nisha Harchekar, senior research analyst, Way2Wealth Securities: “The depreciating rupee will neutralise the impact of any fall in input prices to a certain extent. Also, as industry players are expected to cut prices to restore volume growth, any sharp expansion in the margins will then get restricted.”

The rising dollar is a matter of concern, concurs Adi Godrej, chairman, Godrej Group. “All other things being the same, this is an undesirable development. It will, most certainly, partly negate the benefits to the Indian economy of falling commodity prices,” he said.

The Indian rupee depreciated nearly 34 per cent to Rs 52 (in the Jan-March quarter) against the US dollar. With approximately 30 per cent of raw material and packaging costs directly linked to crude oil prices, Aditya Agarwal, director, Emami, explains: “If we look at falling crude oil prices and the appreciating dollar, the benefit of the former is higher. However, we will not get to enjoy the full benefit as our import bill is now being calculated at Rs 50 per dollar as against Rs 40 a year ago.”

In the past year, FMCG companies have been growing at over 18 per cent. “With low inflation rates, FMCG companies will not be able to increase prices (negligible value growth). However, product prices across the sector have also not significantly fallen and hence, volume growth will be constrained,” said Anand Shah, FMCG analyst, Angel Broking.

Positives for FMCG companies include the 4 per cent excise duty exemption announced in the stimulus package. FMCG companies like Hindustan Unilever passed on these benefits to consumers with price cuts and increased grammage of some of its mass consumer products like Lux, Wheel Powder and Lifebuoy to increase volumes.

The price cuts were required to spur volumes as well, which had dipped during the October to December 2008 quarter on account of FMCG companies increasing prices (20-35 per cent) and reducing grammage through the year due to rising input costs.