Analysts hope volume growth will ring in FMCG gains

Of the nine large FMCG companies in the sample study, two companies have witnessed a lower volume growth number as compared to the past three to four quarters

Fast moving consumer goods (FMCG) companies' results for the June quarter (first quarter or Q1 of FY17) are a reflection of the weakness in consumption demand. Most of them failed to improve their volume growth.

Of the nine large ones in the sample study, two had a lower volume growth number as compared to the past three to four quarters. These are GlaxoSmithKline Consumer and Bajaj Corp.

The overall weakness is despite the fact that six of these nine companies had passed on the benefit of benign input cost inflation to customers, as reflected in their flat to negative pricing growth in the quarter.

The outliers are Emami and Colgate, which saw some increase in volume growth on the back of acquisitions (Kesh King acquired by Emami) and new launches (herbal toothpaste by Colgate). Notably, Colgate and Emami were the only two that managed to move up the pricing as they focused on new product launches and re-launches.

For Colgate, though, the Street will now watch for sustainability in volume performance, given the high competitive intensity. Amid slowing category growth, the focus has shifted to market share gains in the toothpaste segment, where natural products-focused entities Dabur and Patanjali have done well. Hindustan Unilever (HUL) continues to lag here.

Godrej Consumer Products' domestic revenue growth was weak, on the back of seasonal weakness in its home insecticides business. Its management expects this to improve from the ongoing quarter.

Of the rest, HUL, Britannia and Dabur maintained their overall volume growth in Q1, as compared to the previous three to four quarters. Dabur’s pricing, though, weakened further, leading to flattish growth in domestic revenue.  

On the flip side, Bajaj Corp’s overall volume growth was pulled down by a  subdued show of its No Marks portfolio, even as its flagship Bajaj Almond Hair Oil had decent volume growth of 2.2 per cent. While this metric has improved sequentially, it is at the lower end of the volume growth in the past few quarters. Bajaj Corp's peer in the hair oil segment, Marico, maintained its domestic volume growth, with continued traction in key brands such as Parachute, Saffola and value-added hair oils.

Apart from toothpaste, health food drinks (HFD) is another area which pulled down Q1 performance of the sector. "By our estimates, GSK Consumer’s HFD portfolio reported a volume decline of five per cent due to excise benefit phase-out, decline in sachets, muted growth in Boost, moderation in rural growth and category slowdown," says Ruchita Maheshwari, analyst at IIFL. The company, however, continued to gain market share in this category.

The bad news ends here. While weakening rural sales has continued to hit FMCG companies' performance, the road ahead looks promising. A good monsoon, coupled with rising salaries of government employees and implementation of higher military pensions will aid rural demand, say experts.

Abneesh Roy, analyst at Edelweiss Securities, says: "This quarter has been tough for FMCG companies because rural growth is at a 10-year low. However, things should improve in the second half of this financial year, as most companies could take a two to three per cent price hike to pass on some pressure from (higher) input costs." They've begun doing so in select products.

However, investors will have to keep expectations in check. In a rising input cost environment, most analysts believe the strong margin gains in operating margins are behind for these companies. They expect these gains to peak in the next one or two quarters, at best.