FMCG Q3 Preview: Consumption growth to boost companies' topline
The average of the total estimates of ETIG and five other brokerages for eight leading FMCG companies indicate a 20% increase in revenues during the December 2010 quarter.
The average of the total estimates of ETIG and five other brokerages for eight leading FMCG companies indicate a 20% increase in revenues during the December 2010 quarter compared with the year-ago period. Festivals and a good winter have ensured high consumption demand for the industry. As most companies have selectively raised the price of their products, the growth in revenues is likely to be driven by a mix of volume as well as value.
FMCG companies are expected to log a modest growth of 16% in net profit. The net profit margin for the group of companies is likely to drop by 50 bps to 16.2% YoY. Profit margins of most companies are likely to contract, largely because of the high input cost.
Raw material costs typically account for 40-50% of the turnover of consumer goods companies. The rise in prices of key raw materials such as milk, wheat, sugar, copra, tea and coffee are likely to threaten the bottomline of companies like Godrej Consumer Products, Dabur, Nestle, Marico and HUL. Steadily rising crude oil prices are also a concern for the companies, as packaging costs may shoot up.
In the December quarter, expenditure on marketing and promotion is likely to have been high. Besides mass media advertising, companies are aggressively chasing volumes by spending more on ground-level (below-the-line) marketing activities. The ad spends are estimated to be in double-digit percentage to the companies' net sales.
HUL is likely to continue to post a recovery in the quarter. It has been aggressive in marketing to gain market share across product categories. Though the company is expected to post a 12% rise in revenues, its bottomline is likely to remain flat due to a high base effect.
The tobacco-to-FMCG major, ITC, is likely to post a 16% growth in earnings on 18% increase in turnover. GCPL's December quarter results will not be comparable with the same quarter in the previous fiscal due to consolidation of the acquisitions it has made since the last fiscal.
Rising inflation poses a threat to consumer spending. Sustaining volumes growth in such a scenario is going to be challenging for the companies. In an inflationary environment, companies have little room to raise prices, even as high raw materials hurt margins.
Good supply chain management and vendor relationship, strong distribution network, innovative product portfolio and having products across various price points may enable companies to successfully achieve the balancing act.