As the slowdown in the fast-moving consumer goods (FMCG) market gets pronounced, most companies are shifting their attention away from volume growth. Now, they are focusing on earnings growth, led by a cut in advertising spends and other expenditure.
Consider this: The six companies who reported their June quarter (Q1) results in the last one week saw a cumulative net sales growth of 8.9 per cent and profit growth of 12.7 per cent (see chart).
Top line growth, in particular, has been weak as underlying volume growth, which began to moderate in the March quarter, tapers even further in Q1. Hindustan Unilever’s (HUL’s) volume growth, for instance, was the lowest in seven quarters in Q1, coming in at 5 per cent only. In the March quarter, HUL’s volume growth was 7 per cent.
But on the margin front, HUL had good news to report, seeing a 250-basis-point improvement in operating or earnings before interest tax depreciation and amortisation (Ebitda) margins in Q1.
Excluding the Ind-AS 116 impact on lease accounting that kicked in from the June quarter, Ebitda margins expanded by 150 basis points as HUL reduced ad spends and other expenses by 70 basis points and 150 basis points each. One basis point is equal to one-hundredth of a percentage point. Other expenses include sales and distribution overheads.
Besides HUL, companies such as Dabur, Asian Paints and Jyothy Labs also saw Ebitda margins expand in Q1, between 140 basis points and 182 basis points. The only exceptions were Colgate - Palmolive and Bajaj Consumer. The oral care major’s Ebitda margins were flat in Q1, while Bajaj Consumer saw its Ebitda margins contract by 188 basis points as it kept ad spends high in the June quarter.
“In times of a slowdown when sales volume can no longer be a lever for growth, keeping overheads low and extracting efficiencies from the value chain is a key strategy that companies are deploying,” said Naveen Trivedi, research analyst, brokerage HDFC Securities.
“The focus on earnings growth will only increase in the coming quarters as the market slowdown persists,” he said.
Last week, market research agency Nielsen had lowered its CY19 growth forecast for the FMCG market, saying it would be in the region of 9-10 per cent versus 11-12 per cent estimated earlier. The assessment was based on the performance of the market in Q1, which had moderated to levels of 10 per cent in terms of overall rate of growth versus 13.4 per cent and 15.7 per cent seen in the March 2019 and December 2018 quarters, respectively.
While benign raw material prices have aided margin growth in Q1, analysts say companies may have to initiate further cost rationalisation measures in the future to support earnings growth.
“A further tightening of back-end and front-end operations may happen, aimed at cutting flab wherever possible,” said Nitin Gupta, research analyst, SBICAP Securities.
On a year on year basis, the price of crude oil has declined by 13 per cent, while the price of palm oil has reduced by 6 per cent. Both are key inputs in FMCG. On Tuesday, HUL’s Chairman and Managing Director Sanjiv Mehta said both crude and currency were important factors to monitor in the future.