FMCG Mid-cap: 1QFY07 review - Views on News from Equitymaster

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FMCG Mid-cap: 1QFY07 review

Aug 25, 2006

In our last article we wrote on the performance of the large FMCG companies (link) for the June quarter. In this article, we bring you an analysis of the performance of 4 mid-cap FMCG companies. This analysis comprises of Marico, GSK Consumers, Godrej Consumer Products (GCPL) and Colgate.

Rs (m) June-06 June-07 Change
Net sales 9,396 11,428 21.6%
Expenditure 7,970 9,648 21.1%
Operating profit (EBDITA) 1,426 1,780 24.8%
Operating profit margin (%) 15.2% 15.6%
Other income 221 309 39.8%
Interest 30 67 123.3%
Depreciation 219 280 27.9%
Profit before tax 1,398 1,742 24.6%
Tax 349 478 37.0%
Profit after tax 1,049 1,264 20.5%
Net profit margin (%) 11.2% 11.1%

What has driven performance in 1QFY07?
Outperforming at the topline level: The topline of the 4 FMCG companies grew by a decent 21.6% YoY. This was mainly due to growth across all categories like hair oil, soaps and oral products. When compared to the larger FMCG companies, the mid-caps have outperformed these companies in terms of sales growth. It should be noted that FMCG is more of a volume game, and with increasing demand for products across categories, sales are likely to be robust going forward.

If we take a company-wise break-up, GCPL's core portfolio of soaps (66% of revenues) outperformed (21% YoY growth) the industry growth (8% YoY) once again, while revenues from the toiletries segment grew by a strong 41% YoY, backed by growth across categories (talcum powder, shaving cream and diapers). GSK Consumer's flagship brand, 'Horlicks', reported strong double-digit growth during the quarter. Also, its 'Chocolate Horlicks' brand witnessed strong sales on the back of strong sales and marketing efforts. Marico witnessed good volume growth across its hair care range. It focus brands grew by 25% YoY. Colgate too witnessed a healthy 11% YoY increase in volumes.

Stable-to-positive margins: The expenses of the 4 mid-caps under consideration increased at nearly the same pace as sales. Raw material prices (as a % of sales) have witnessed a decline during the quarter. However, the companies witnessed higher labour and advertising costs. Most of the companies increased their advertising costs in order to face increasing competition and launch new products. Going forward, we expect input costs to rise.

Bottomline growth in-line: The growth in the bottomline of the mid cap companies, at 21% YoY, was similar to the large caps. However, this trailed the growth in topline as well as operating profits. This was mainly because of higher interest costs. Also, the tax outgo has increased, as the Baddi plant benefits have nearly come to end, and the effective tax rate increased from 25% in 1QFY06 to 27% this quarter.

Of the 4 companies, Marico performed the best, with an impressive 45% YoY increase in its bottomline. Colgate also performed well due to volume-driven growth. Of the 4 companies, GSK Consumers was hit on margins due to increased costs of items like labour.

What to expect?
Mid-cap companies are performing well and are increasing their weight in the FMCG sector. These companies have the potential to explore untapped markets and are already gaining acceptance. We believe that these companies are likely to introduce new variants and will invest in building brands in the future and this, we believe, will drive growth.

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