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FMCG Mid-cap: FY07 review...

May 30, 2007

The financial year has come and gone! The annual results that were awaited amidst much hype and expectations have been declared. The performance of the midcap FMCG has been well in line with what we expected. The volume growth continues to be encouraging. The midcap FMCG companies continued their good performance throughout the fiscal. In this article, we bring you an analysis of the performance of 4 mid-cap FMCG companies under our coverage. This analysis comprises of Marico, Pidilite, Godrej Consumer Products (GCPL) and Colgate. As regards operating metrics, the topline growth seen was a handsome 28% YoY. However, margin contraction was evident, with all the companies witnessing higher costs as a percentage of sales. At the same time, due to higher interest costs, the bottomline grew at a slower pace than the topline performance.

Rs (m) FY06 FY07 Change
Net sales 38,753 49,596 28.0%
Expenditure 32,683 42,351 29.6%
Operating profit (EBDITA) 6,070 7,245 19.4%
Operating profit margin (%) 15.7% 14.6%
Other income 759 989 30.3%
Interest 137 375 173.7%
Depreciation 1,178 1,120 -4.9%
Profit before tax 5,514 6,739 22.2%
Tax 1,154 1,372 18.9%
Profit after tax 4,339 5,319 22.6%
Net profit margin (%) 11.2% 10.7%
* (results of Marico, Colgare, Pidilite and Godrej Consumers)

What has driven performance in FY07?
Volume driven: FY07 was characterised by strong volume growth for all the midcap FMCG companies. Across categories, volume growth was witnessed. The topline for the 4 FMCG midcap companies has grown by 28% YoY in FY07. Good volume growth along with selective price hikes led to the robust performance. Prices of select brands across categories such as detergents, soaps, cosmetics and toothpaste were up by 5% to 20%, thanks to a steep surge in input and freight costs as well as the end of price war. Consumer demand continued to be robust, having grown by 12% to 15% last year. High-margin products did well, riding on the back of factors like improved purchasing power and product innovations, which was further fuelled by modern trade.

On basis of company performances, Marico performed well with a 36% YoY growth, led by the franchise expansion across its categories. All the business segments namely, domestic FMCG, international FMCG, Kaya Skin Solutions and Sundari Spa Skin products recorded high growth rates. Also, the increase in brand building led to healthy volume growth. Colgate recorded a 10% unit volume growth and 9% value growth in its core toothpaste category during the year on a YoY basis. Its market share also improved by 80 basis points to reach 48.9%. In toothpaste, the same jumped 180 basis points and in toothbrush reached 35.4% in FY07 (both in volume terms). Strong trends in end user industries led to a 27% YoY growth in the topline of Pidilite with both its segment growing by 23% YoY. The 35% YoY growth in GCPL's consolidated topline during FY07 was led by strong performance from the company's personal care division, which grew sales by 62% YoY. Growth in the personal care segment was led by the toiletries segment (around 46% of personal care segment revenues), which recorded a strong sales growth of 163% YoY during the fiscal. The other sub-segment of hair colour, where GCPL is among the market leaders, witnessed a sales growth of 29% YoY.

As a % of net sales FY06 FY07
Total Cost of goods 49.2% 49.4%
Staff Cost 7.8% 8.1%
Other Expenditure 27.3% 27.9%

Margins fall: In FY07, operating margins fell by nearly 110 basis points. Higher raw material costs led to the margin pressure. Inspite of selective price hikes done by the companies, the margins have declined. Also the advertising costs have increased. Companies are heavily investing in brand building and introducing newer products and extensions. This is a clear indication of the fact that competition is here to stay, and could only intensify in times to come.

Bottomline view: Lower margins aided by higher interest costs led to the bottomline trailing the growth in the topline. Interest costs were higher due to acquisitions and expansions of capacities. While the tax rate fell for Colgate, due to its Baddi plant, Marico's effective tax rate inclusive of fringe benefit tax and deferred tax during the current fiscal is about 25% (including the one time impact of provision for earlier years). This is as compared to 11% during the same period in the previous year. The increase in the effective tax rate is mainly because of the tax exemption on some of the manufacturing units being exhausted. Even GCPL's tax expenses increased by a substantial 116% YoY (effective tax rate increased from 8.5% in FY06 to 15.4% in FY07), thereby paring the bottomline growth during the fiscal.

What to expect?
The year saw the firms in India doing a balancing act. On one hand, rising affluence has resulted in consumers spending more on premium products. At the same time, despite rising input costs, companies were forced to maintain certain price points at the lower end to increase their volume growth. Going forward, we expect the FMCG sector to continue its growth momentum driven by strong volume growth. The players would continue spending heavily on promotions and new launches. Fast growth of modern retail will also spur consumption of branded goods. Operating margins, however, are likely to remain flat or be hit further, with most companies indicating that ad spends would be maintained at current levels or may be hiked further.

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