FMCG makers stare at lower volume & margin growth

Analysts say lower consumer expenditure will continue to dampen sales

The three months ended December, usually an upbeat festive season for fast-moving consumer goods (FMCG) makers, could be unusually disappointing because of lower consumer spending. Analysts say in the third quarter, companies were most likely to see pressure increase on volumes and margins.

In the quarter, volume growth could range from five to 10 per cent, lower than the 10-15 per cent seen a year ago. In the second quarter of FY14, volume growth for most companies was in the region of five-12 per cent as most took advantage of benign input prices, pushing sales promotions aggressively in categories such as soaps, detergents and personal products. The result was that volume growth held on as was the case with the country's largest FMCG company, Hindustan Unilever (HUL), which saw a five per cent volume growth in the September quarter, up from the four per cent it saw in the June quarter.

Companies, however, says Nitin Mathur, analyst (consumer & retail) at Espirito Santo Securities, may not have the cushion of benign input prices in the December quarter as prices of key raw materials such as palm oil and linear alkyl benzene (LAB, used in making soaps and detergents) and copra (used in making hair oils) moved up during the third quarter. LAB, for instance, was up 15 per cent year-on-year.

According to Mathur, most companies have had to reduce sales promotions they were aggressively offering in the second quarter because it became untenable for them to continue with these schemes. "A consequent impact on volume growth will be there," he says. "Plus, the demand environment does not build a strong case for taking aggressive price hikes, which means top line growth will not be very strong."

V Srinivasan, analyst (FMCG) at Angel Broking, says he estimates top line growth to be 11-12 per cent and bottom line growth, 13-14 per cent for the quarter under review. A year ago, both top line and bottom line growth for most companies was above the 15 per-cent-mark. Even in the September quarter of the current financial year, most firms held on to growth levels on the back of higher volumes and lower input costs.

High ad spends
That may not be the case now as margins, especially operating margins, decline because of high advertising spends.

While operating margins were under pressure in the September quarter, this is likely to accelerate in the December quarter, says Kaustubh Pawaskar, analyst at Mumbai-based brokerage Sharekhan.

Pawaskar points out that ad spends have steadily increased in the past year, moving from 10-11 per cent of net sales to 12-15 per cent now. Companies such as Colgate, HUL and GSK Consumer have all had to increase ad spends as competitive pressures in categories such as oral care, soaps, detergents and personal products were up. The trend was no different in categories such as packaged foods and beverages, considered discretionary in nature.