FMCG: Strong volumes, margin pressure - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

FMCG: Strong volumes, margin pressure

Aug 27, 2008

In the June quarter, FMCG companies saw an impressive topline growth. However, rising input prices and inflation took a toll on profitability. In this article we give an insight to the performance of the FMCG companies.

Rs (m) June-07 Apr-08 YoY growth June-08 QoQ growth
Net sales 101,605 116,597 20.0% 121,948 4.6%
Expenditure 79,837 95,696 24.4% 99,311 3.8%
Operating profit (EBDITA) 21,768 20,901 4.0% 22,637 8.3%
Operating profit margin (%) 21.4% 17.9% 18.6%
Other income 1,898 3,313 51.1% 2,868 -13.4%
Interest (510) - 4.5% (533)
Depreciation 1,647 2,266 42.5% 2,347 3.6%
Profit before tax 22,529 21,948 5.2% 23,691 7.9%
Tax 5,828 5,830 9.2% 6,365 9.2%
Profit after tax 16,520 16,109 5.4% 17,419 8.1%
Net profit margin (%) 16.3% 13.8% 14.3%
*(Financials include the respective quarterly numbers of HLL, ITC, Nestle, Britannia,
Dabur, Marico, Colgate, GSK Consumers and Godrej Consumers)

Sales growth: Sales volumes grew by 20% YoY during the June quarter. However, on QoQ basis, the growth was subdued. With rising income and people consuming more, the growth in FMCG products witnessed strong momentum on YoY basis. However, on QoQ basis, rising inflation and the price hikes effected by companies across products led to slowdown in some segments. While ITC and Nestle were the only ones to launch new products, others companies launched variants of existing ones.

Innovations and renovations
Company Product Segment
Nestle Nido Milk powder
Nesvita Multigrain cereal, Pro heart milk
Maggi Cuppa Noodles Prepared dishes
Polo Extra Strong Chocolates
Kitkat Chunky, Mini Chocolates
ITC Vivel Shampoo
HUL Wheel Active green Detergent
Lux Strawberry & Cream Soap
Axe shock and recover Deodarant
Marico Parachute Advansed Night Repair Cream, Advanced Starz Hair care
Hair & Care Almond Gold Hair oil

Rural India shows promise: For the first time, the rural markets grew faster than the urban market in key product categories in April-May 2008, according to market research firm AC Nielsen. Mass products like soaps, detergents, hair oil and biscuits have good sales in the rural market. Better prices for farm produce, hike in minimum support prices, increased government spending and tax-free income have led to higher disposable incomes. Further, procurement of farm commodities in bulk directly from the fields by retail players, thereby evading the middleman's commission, has helped farmers reduce costs. With rural areas being an important market, almost all FMCG companies are increasing their focus on these areas.

Value growth (%) Hair oil Coconut oil Shampoo Toothpaste
All India - Urban 14.3 13.5 14.6 12.2
All India - Rural 20.4 22 10.3 17.4
Volume Growth (%)
All India - Urban 13.3 13.5 7.8 8
All India - Rural 19.8 21.2 7.4 14.6
Source : AC Nielsen.

  • FMCG: Resorting to price hikes

    Margin blip: As seen from the table, the margins have declined by 2.9% YoY. Raw material cost for most of the companies has been on the up trend. Rising crude prices and inflation on the higher side further added to the fury. Even the packaging costs rose by 20% YoY. Detergents and soaps have been the worst hit owing to constant rise in palm oil prices and LAB prices. Vegetable oils, milk powder and copra are amongst the other raw materials that have seen prices escalate.

  • What's pinching FMCG companies?

    On QoQ basis, the margins have improved by 60 basis points. FMCG companies had resorted to weighted average price hike of 5% to 10% during the last few months across product categories to restrict the margin fall. In addition to price hikes, to tackle the inflation challenge, the companies resorted to cost saving techniques like reducing the packaging size, change in product mix and better sourcing of raw materials. However, on account of increasing competition, in both regional and national regions, fear of losing out on market share and the fear of downtrading would make the further price hikes would be difficult.

    What to expect?
    The FMCG industry is normally the last to benefit from high GDP growth and is also the last one to witness a slowdown in case the economy enters a downturn. The companies expect the volumes to remain strong except in some products where strong demand comes from the lower strata of the society. However, the companies are looking at introducing products targeting this segment to avoid down trading. With increasing commoditisation of products, FMCG companies are also looking at reinvention of products either by repositioning, launching variants or reworking the packaging. Further, as per the industry players, the FMCG sector in rural areas is expected to grow by as much as 40% compared to the growth of 25% in urban areas. With urban markets matured, it is the rural areas, which are likely to drive growth. While further price hikes would be difficult, companies with leadership position in their product categories, diverse product portfolios and stronger pricing power are better placed to combat the inflationary scenario and are a safer bets in the FMCG sector.

  • Equitymaster requests your view! Post a comment on "FMCG: Strong volumes, margin pressure". Click here!


    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    What is EBITDA & EPS?

    Here's a breakdown of what EBITDA margin means and why it is important as a valuation metric for investors.

    It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

    Feb 24, 2021

    Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

    Make Rs 5,000 Per Day Trading the Market (Fast Profits Daily)

    Feb 25, 2021

    In this video, I'll show you how to get started on the path to daily trading profits.

    The Hidden Tesla in My Great Indian Wealth Project (Profit Hunter)

    Feb 23, 2021

    An Indian company founded three decades ago in a garage caught my attention...

    How Much Money For Day Trading? (Fast Profits Daily)

    Feb 22, 2021

    In this video, I'll show you how to allocate your capital as a day trader.


    India's #1 Trader
    Reveals His Secrets

    Secret To Increasing Your Trading Profits Today
    Get this Special Report,
    The Secret to Increasing Your Trading Profits Today, Now!
    We will never sell or rent your email id.
    Please read our Terms


    Mar 4, 2021 (Close)