FMCG: Looking good

Price hikes should see these firms post some good top line numbers.

FMCG firms did well in the June 2008 quarter despite operating in a challenging cost environment. Driven by a mix of better volumes and higher prices, the top line for a sample of companies tracked by brokerage Morgan Stanley, were up a shade under 20 per cent. However, while realisations were up, the price hikes were not enough to fully mitigate input cost pressures. The story could be much the same for the September quarter.

Falling prices of crude oil products and palm oil have, no doubt, come as a relief for FMCG players. Some of them have been able to pass on the higher cost of inputs through some additional price hikes but the full impact of a smaller raw materials bill will take a while to come through.

Colgate, for instance, had increased prices by 3-4 per cent earlier this year while Dabur had upped prices of hair oil, chawyanprash and toothpaste by 4 per cent and shampoos by 7 per cent. The Rs 1,906 crore Marico had increased prices of Parachute hair oil by 5-6 per cent while the Rs 13,717 crore Hindustan Lever too had upped prices of a few brands by about 10 per cent.

As a result, top line numbers should be reasonably good for the September 2008 quarter. Godrej Consumer should see net sales up by 20-21 per cent y-o-y while Hindustan Unilever is expected to grow revenues by about 19-21 per cent driven by better volumes in soaps and detergents. A low base should help HUL see strong growth in personal products too. The Rs 3,504 crore Nestle India, the star performer of the last two quarters, should deliver a revenue growth of 20-22 per cent while Britannia could come up with a strong 18-20 per cent. Colgate Palmolive is likely to up sales by about 14-16 per cent with strong contributions from both toothpaste and toothbrushes.

In the June 2008 quarter, both gross margins and operating margins were weaker. Copra prices shot up by 30 per cent y-o-y pulling down the operating profit margin for Marico by 150 basis points to 12.5 per cent, despite revenues growing a smart 28 per cent. Even Nestle could not buck the trend: with milk and wheat prices up, operating margins were down some 70 basis points. Over the past few months, prices of crude oil have come off by 32 per cent while palm oil prices have dropped by about 30 per cent.

For soap makers such as the Rs 1,104 crore Godrej Consumer, a lower raw materials bill should help it to maintain operating profit margins in the September 2008 quarter; any expansion would probably be seen in the later part of the year. Colgate’s margins may expand by 10-20 basis points because of a low base effect but with prices of agri-commodities firm, Britannia’s margins may not expand.

The BSE FMCG index has outperformed the market since the start of the year, giving up just about 8 per cent compared with a loss of about 38 per cent for the Sensex. Since the start of August, the index has actually risen 3 per cent while the Sensex has lost about 14 per cent.

Not surprisingly, valuations are not cheap. At 29 times estimated CY08 earnings, Nestle is not cheap though the valuations are probably justified given its performance. HUL, at Rs 251, commands a price earnings multiple of 28 times and is expensive. Britannia, at Rs 1,346, and Godrej at Rs 109 trade at just over 14 times estimated FY09 earnings. At the current price of Rs 59, Marico trades 19.5 times.