FMCG cos to weather slowdown storm in Q4

Price-led growth likely to be higher pushing up revenue growth for quarter

Consumer goods companies are expected to play to a familiar script in the forthcoming results season that kicks off in a fortnight. But the notable exception will be that topline growth, estimated at 11-13% for the three months ended March 2014, will be led by price rather than volume.

Analysts tracking the sector say that price-led growth for the March quarter will be in the region of about 6-7%, higher than the 3-4% seen in the third quarter. Volume growth, on the other hand, is expected to be in the region of about 4-5% as consumer sentiment remain tepid.

"Pricing action began in the December 2013 quarter. However, it has been a bit more pronounced in the last three months," V Srinivasan, FMCG analyst, Angel Broking said. "This will reflect in the revenue numbers that companies will put out for the fourth quarter," he said.

In the last few months, the price of inputs such as palm oil, used to make soaps, have risen by 20%. Similarly, copra prices, used to make coconut oil, have risen by over 60%, while linear alkyl benzene (LAB), used to make detergents, is up by about 10-11%.

It is not out-of-turn therefore that companies are raising product prices, analysts said. For instance, the consumer promotions (buy one get one free schemes) that were visible in soaps & detergents in the second and third quarters of the current fiscal by companies such as Hindustan Unilever, the country's largest consumer goods company , have been discontinued in the fourth quarter. The indirect price cuts through these schemes were as high as 25-30% on select stock keeping units. This is now down.

Similarly, companies such as Marico, the maker of brands such as Parachute, have raised prices of the latter by 12% during the December quarter. The company has said that it will hold on to price lines in the March quarter as pressure on the share of wallet of consumers mounts. But analysts say that it is unlikely to be the case with copra prices seeing the steepest hike among agri commodities in the last few months.

Meanwhile, even as the price of crude oil eased today, standing at $99 to a barrel on weak Chinese manufacturing data, it is expected to pick up as the US mulls further sanctions on Russia, the world's second-largest oil producer.

A spike in crude prices has a cascading impact on all derivatives including those used to make packaging material. Marico and most other companies are expected to face cost pressures on that front as well, analysts said, implying they will be unable to hold onto price lines with both input and packaging costs up.

Margin pressures

The flip side of Input cost pressures is that gross margins of companies, analysts said. In the last two quarters, gross margin expansion seen by companies as a result of lower commodity costs was in the region of about 400-500 basis points, helping companies cushion the impact on the operating margin front due to high ad spends.

"But with gross margins contracting, operating margins could erode further with ad spends continuing to be high," says Kaustubh Pawaskar, FMCG analyst at Mumbai-based brokerage Sharekhan.

Ad spends as a percentage of sales in the last few quarters hovered in the region of about 13-14%. This is likely to remain constant in the fourth quarter as competition continues to be high. Analysts estimate that companies are likely to report a bottomline growth of about 9-10%, tad lower than the number (10-11%) reported in the third quarter.