Rural demand helps FMCG cos buck slowdown in Q2

In what appears to be a clear signal that demand remains strong for consumer staples, fast moving consumer goods (FMCG) companies reported good numbers for the September quarter, with a close to 20 per cent top line growth for most firms. In some cases, such as Dabur, Marico and Godrej Consumer Products, the top line growth was higher at 23-30 per cent.

This was largely driven by robust demand in rural areas, said market experts. While most firms did not give the urban-rural sales break-up, sector analysts said rural sales stood at 35-40 per cent of the total sales. Over the last few years, rural sales constituted 25 per cent of the total sales.

On the bottom line front, barring a few companies, most others reported double-digit growth, indicating they managed their expenditure quite well during the quarter.(Click here for PERFORMANCE REPORT CARD)

Arnab Mitra, FMCG analyst at city-based brokerage Indiainfoline, said, “Definitely, most firms performed better than expected. At a time when inflation and interest costs have hit share of wallet, it did come as a bit of a surprise that consumer staple firms did well. It shows that demand is holding up.”

While gross margins did contract by 200-400 basis points (bps), thanks to input cost pressures, companies were prudent enough to bring down advertising and sales promotion expenditure, which as a percentage of sales was lower by 200 bps.

Firms also took up prices during the quarter, much more than they did in the June quarter, to deal with inflationary pressures. But most admitted they would be careful while using this tool. On an average, companies took up prices by at least 10 per cent during the quarter. In categories such as coconut oil and edible oil, where input cost pressures have been severe, the quantum of price increases was more, at 30 per cent during the quarter. In the June quarter, price hikes were six-seven per cent.

The result of all these measures was that most companies managed to sustain operating profit margins during the three months to September. Some such as Hindustan Unilever showed an improvement in operating profit margins by about 138 bps, while firms such as Marico saw a decline of 80 bps.

At a time when competitive pressures remain steep, bringing down ad spends is not easy, say analysts. But Dabur chief executive Sunil Duggal said managing allied expenditure remained crucial in the company’s fight to contain inflation.

“Price hike is an option, but it has to be used prudently. What then is available to you is a disciplined approach to managing costs. That is an important tool,” he said.

Most companies are likely to continue focusing on the top line growth even as they keep a hawk’s eye on underlying costs. “Top line will be driven by both volume and price-led growth,” said Kaustubh Pawaskar, FMCG analyst at Sharekhan. But firms are likely to feel less pressure on input costs by the fourth quarter of the financial year, as prices begin to come off.

“The trend is already beginning to show,” said Mitra. “This will improve by the fourth quarter,” he said.