Business OpportunitiesITC results bode well for FMCG firms
Fast moving consumer goods (FMCG) companies are likely to register a modest growth for the July-September 2009 quarter on the back of rising consumer demand which is expected to considerably reduce the impact of a disappointing monsoon on sales. Traditionally, summer and winter months make up 30-40 per cent of any FMCG company’s overall sales.
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In the reporting quarter, for instance, diversified conglomerate ITC posted a 26 per cent rise in net profit, helped by an overall strong performance in all its business operations, except hotels. Its FMCG (cigarette and others) business reported a 14 per cent growth in revenue.
Godrej Consumer Products and Marico, too, are likely to report robust earnings and sales in the July-September quarter on higher volumes and lower raw material costs, say analysts. "Steady growth in soaps, revival in hair colours and acquisition of 49 percent stake in Godrej Sara Lee (GSL) give Godrej Consumer a formidable FMCG portfolio to sustain growth," say Angel Broking analysts. Godrej Consumer, which makes and sells several brands across soaps, hair care and toiletries segments, is best known for its flagship brand Cinthol and "Godrej Expert Hair Dye".
Palm Oil, Godrej Consumer"s primary raw material, has also fallen sharply since the second half of last fiscal. Godrej Consumer is likely to expand gross margins by 660 basis points due to a sharp fall in palm-oil prices after the second quarter of FY09, Motilal Oswal said in a report.
Marico"s revenues are expected to rise on steady volume growth in its flagship "Parachute" hair oil brand and edible oil "Saffola", mainly on account of price cuts and promotional offers. Prices of Copra and Safflower, the key inputs for Marico, have come down by around 20 percent on year. "Strong pricing power in Parachute and continued traction in Saffola volumes are likely to boost volume growth. We expect strong double-digit sales growth in its hair oils portfolio," say analysts at Motilal Oswal.
H K Press, vice-chairman of Godrej Consumer Products (GCP) confirms: “Festive months are not so significant for FMCG companies as are summers and winters. For most FMCG companies, bad monsoons this year was a major concern but so far it has not had an impact on our sales.”
Analysts note that rural India is giving a lot of reason to cheer about even as urban consumers rationalise spending. While FMCG companies are seeing a volume growth of just 6-7 per cent in metros, their growth in rural markets is over 20 per cent. Rural income levels are on the rise, according to a recent study by the Rural Marketing Association of India (RMAI), driven largely by a continuous growth in agriculture for four consecutive years. The government"s continued focus on rural development initiatives has further empowered the rural consumers, fuelling a fresh demand for FMCG firms.
Godrej Consumer, for instance, is focussing strongly on rural sales. Currently, rural sales make up around 38 per cent of its turnover. “We intend to take it to 50 per cent within a year. We have project ‘Dharti’ for rural India and we cover close to 17,000 villages. We intend to cover 50,000 villages soon. This also means that the 4,000 sub-stockists we have in rural areas in India would be more than doubled, creating more employment opportunities,” says Press.
Anand Shah, analyst with Angel Broking, says: “For Hindustan Unilever (HUL), we maintain our neutral stance, with its market-share losses being a key concern, until clear signs of revival in core categories emerge and monsoon concerns fade.”
“In mid-caps, Godrej Consumer (GCPL) is likely to see significant margin expansion and the Godrej Sara Lee (GSL) consolidation would address portfolio concerns. We also maintain a neutral view on Dabur with its core categories and growth drivers at a risk and on Colgate (the competition in the toothpaste segment can intensify), due to their higher vulnerability to the monsoon,” Shah added.
Price hikes are likely to take a backseat. During FY2009, most FMCG companies had resorted to judicious price hikes to protect their dwindling margins. However, as the economic slowdown takes its toll on consumer spending, even as inflation declines, FMCG companies are tweaking their pricing strategy to retain consumers and to safeguard their volume growth.
Most commodity prices softened during second half of the current fiscal, which may aid margin expansion for FMCG companies, in year-on-year terms, during the July-September quarter. Agri-commodity, particularly those sourced domestically, prices are expected to remain firm. While wheat, barley, copra and safflower prices continue to remain benign, other commodities like sugar, tea, coffee and milk are expected to rise further in the coming quarters, largely due to the poor monsoon in India.