Input costs curb margin expansion but some firms could e better placed to absorb inflationary pressures
Even as high inflation persists, increased competition has weakened the pricing power of packaged consumer goods companies, ratcheting up the pressure on margins during the quarter ended December 2010.
A Mint survey of eight brokerages--ICICI Securities Ltd, Sharekhan Ltd, Prabhudas Lilladher Pvt. Ltd, Motilal Oswal Financial Securities Ltd, Elara Capital Ltd, Indiabulls Securities Ltd, Edelweiss Capital Ltd and Angel Securities Ltd--shows that companies have registered robust growth, with profit having risen 7-17% and sales by 10-20%.
The rise in input costs, though, will curb margin expansion for most firms, but selective price hikes indicate that some firms could be better placed to absorb inflationary pressures in what is proving to be a tough time for the sector.
The hardening of input costs may erode profit despite price hikes as the full extent of the rise in raw material prices has not been passed on to consumers, said an earnings pre- view note by Gautam Duggad, analyst at Prabhudas Lilladher, on fast-moving consumer goods (FMCG) companies.
Raw material prices for most companies in the sector rose sharply in the quarter.
For instance, the price of palm fatty acid distillate (PFAD) rose 40%, said an 11 January report by Amnish Agarwal of Motilal Oswal Serv- ices.
PFAD constitutes 65-70% of the total weight of toilet soaps and is a key input for manufacturers such as Hindustan Unilever Ltd, which makes Lux and Lifebuoy, Godrej Consumer Products Ltd (GCPL), maker of Cinthol and Godrej No. 1, and Wipro Ltd's consumer arm Wipro consumer care and lighting, which makes Santoor.
Copra, a key input in coco- nut oil, rose 30% in the period.
The main users of copra include Marico Ltd, maker of Parachute, and Dabur India Ltd, which makes Vatika.
The main users of copra include Marico Ltd, maker of Parachute, and Dabur India Ltd, which makes Vatika.
“Due to the sharp increase in input costs, the company has taken retail price increases to offset a part of this impact”, said Chaitanya Deshpande, executive vice-president and head, mergers and acquisi- tions and investor relations, Marico. “The value growth during the quarter will be higher than the volume growth. This also implies that the margins in percentage terms are likely to be lower”.
Marico is the worst-hit in the sector by rising costs, according to Duggad of Prabhudas Lilladher. The report by Agarwal downgrades the earnings estimate of Marico for the fiscal ending March 2011 by 12%.
Packaged consumer goods companies would have seen 3-5% value growth during the quarter. Price increases have not had an impact on overall sales yet.
“Consumer demand remain strong even though inflation I high”, said Adi Godrej, chair man, GCPL.
The company took a 3-5% increase in prices, with some categories such as hair colour seeing a larger price increase of 10%.
Additionally, to offset the pressure of rising input cost on margins, firms have also cu back on advertising and sale spends during the quarter said Vineet Agarwal, president Wipro consumer care and lighting division.
The coming quarter will see some more price increases to balance the impact of high inflation, he said.
With food inflation persisting at high levels during the last week of December, there may be an impact on consumption growth in the coming months, said Vinee Trakroo, who until a month ago was vice-president, marketing, at Cavinkare Pvt. Ltd the maker of Chik and Meera shampoo.
Besides, better visibility on the earnings potential of the sector is likely to ensure that the stocks of these companies trade at a premium to the market, analysts said.
The BSE FMCG index trade at 27.5 times estimated earnings for fiscal 2011. In comparison, the 30-stock Sense trades at 18 times its forward earnings.
During the quarter, companies maintained the momentum of launching new products and re-launching existing s ones with new formulations. The food and beverages category witnessed the most during the quarter.
Heinz had the most launches, followed by Dabur India
s Heinz expanded its portfolio t with the launch of Heinz Home s Style chutneys, Heinz Chef , Style sauces, Heinz Kitchen , Klassics, ready-to-eat meals and instant mixes, and
Heinz Golden Circle juices.
s Heinz expanded its portfolio t with the launch of Heinz Home s Style chutneys, Heinz Chef , Style sauces, Heinz Kitchen , Klassics, ready-to-eat meals and instant mixes, and
Heinz Golden Circle juices.
The quarter also saw firms continue their inorganic - growth strategy whether it was global companies looking at a - larger India play as with Reckeitt Benckiser Group Plc's ac- quisition of Gujarat-based Par- - as Pharmaceuticals Ltd or Germany's Oetker Group acquir- t ing Fun Foods Pvt. Ltd.
Domestic companies also - continued with their inorganic, growth strategy as Dabur acquired Namaste Laboratories Llc, a US-based ethnic hair colour manufacturer. This marked Dabur's entry into the t fast growing $1.5 billion s (`6,780 crore) ethnic hair care - product market in the US Europe and Africa .
Among other deals, GCPL - acquired Naturesse Consumer - Care Products Ltd and Essence x Consumer Care Products from Muskan Projects Pvt. Ltd (which has the Genteel and - Swastik Shikakai soap brands) - for an undisclosed amount.
Among other deals, GCPL - acquired Naturesse Consumer - Care Products Ltd and Essence x Consumer Care Products from Muskan Projects Pvt. Ltd (which has the Genteel and - Swastik Shikakai soap brands) - for an undisclosed amount.
(Source - mint)
