Little cheer for FMCG firms in Q3

Cautious pricing strategy has put pressure on margins, say analysts.

Third quarter results are likely to be a mixed bag for consumer product companies.

While firms would have a reason to cheer about the topline, since growth will likely be in the region of 16-18 per cent, the picture would not be that rosy on the margin front. Operating margins are likely to decline by 100-150 basis points in the third quarter.

The key factor for this decline is the limited pricing power of companies. While volume growth is likely to be 10-11 per cent, price-led growth, according to fast moving consumer goods (FMCG) analysts, would be six–seven per cent.

"Most firms have been cautious while taking up prices, which is why price-led growth is likely to be far lower than volume growth," says Shirish Pardeshi, senior FMCG analyst, Anand Rathi.

The reason to be cautious was backed by the intention not to drive away consumers reeling under the burden of inflation and interest costs.

While food inflation has started declining, headline inflation continues to be nine per cent. It was 9.11 per cent in November. The expectation is that December inflation, numbers of which would be released in mid-January, would fall below eight per cent.

But this fall is not likely to go below six per cent, which is the Reserve Bank of India's comfort level. All these factors have prompted companies to be prudent with their pricing policy despite the pressure on margins.

The December quarter typically is an important one for most consumer goods companies. It is also one of the largest quarters for most firms, where players try to drive sales taking advantage of the festive mood.

This strategy, say analysts, has worked for companies at a time when the overall environment hasn't been easy. The economy is slowing and rural sales are showing signs of moderation. Add to this the depreciating rupee, which has depereciated 20 per cent since August, making import of raw materials costly.

Companies have used different levers to tackle the situation such as input substitution to curtailing ad spends.