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FMCG: Crystal gazing...

Jan 17, 2007

Well, it's that time of the year again - companies lining up to announce their quarterly results! The result announcements are expected to be the key factors that will drive the markets in the near-term. Sales trends, the demand environment, cost-side pressures, operating margin trends, competitive pressures and supply side issues are expected to be read into with great interest by market watchers. We attempt to analyse the major factors that are likely to influence the performance of the FMCG companies. Growth momentum: The overall consumer market growth rates have crossed 15% in 2006 and are expected to remain buoyant in 2007, backed by robust demand trends across product categories. All the larger categories like soaps and detergents have continued to show better growth during the quarter. Rural markets too have reported an 18% growth and aided by the favorable monsoons, agriculture is expected to grow by about 2.6% during the year. This continued growth in agriculture would provide the required buoyancy to rural incomes. Also, this will help pick up in volumes. In the urban areas, the consumer-demand trends have picked up faster in the high-margin, value-added product segments. Companies across categories are focusing on high-margin products to cash in on aspirational purchases and improve profitability. Modern trade is also playing a significant role in pushing consumption levels and several regional brands have now scaled up to a national level and helped expand the market. Overall, on the topline performance parameter, the companies are expected to do well.

Late winter: Winter products may see some slow down as winter season is expected to be delayed by one month. Winter products like winter skin creams and hot beverages are expected to see slower growth during the quarter on a year on year basis. This may also have an impact on the profitability of companies like HLL and Dabur, which have winter products like winter skin creams and Chyawanprash, where the margins are high.

Pressure on margins: Commodity prices have firmed up in the last few quarters. Wheat, milk and crude oil prices have all gone up. Palm oil (an important ingredient in soap) prices are up 15% YoY, coffee prices up are 22% to 23% YoY, tea prices are up 15% to 20% YoY and milk prices have hardened by 25% to 30% YoY. Higher milk prices in addition to wheat prices may squeeze the margins of companies like Nestle and Britannia. The rising prices of palm oil are a cause of concern for soap manufacturers, though they have raised the prices of soaps. Soaps and detergents prices have been raised by about 5% and 2% respectively. Favorable demand environment and the overall rise in income levels have made the price rise possible.

We concur...
The demand for FMCG products may continue to grow in double digits. Rural areas will continue to be the key growth drives. Rising income, favourable consumer trends will aid the buoyancy in the topline performance of the FMCG companies. However, the rising input costs are likely to cap margin expansion. Though companies have done price hikes, further hikes may not be easy as this may constraint the rural demand. To conclude, while growth for the FMCG majors is a given, the same will not be without several hiccups on the way.

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