Firms raise prices as raw materials eat into margins

Operating profit margins of consumer goods firms were squeezed by higher raw material costs in the April-June quarter, forcing them to cut on advertising and increase product prices.

Average operating profit margin, a measure of a company's overall operating efficiency, for 42 publicly listed companies reviewed by Mint was 18.17% in the June quarter, compared with 18.55% in the year-ago period.

Companies attribute this to a spurt in prices of raw materials. For instance, palm oil, an essential ingredient for soaps, was dearer by 28.81% in the June quarter. Crude oil, a derivative of which is used to make detergents, gained 40.85% in the same period, according to Bloomberg.

Yet, large consumer goods companies such as Hindustan Unilever Ltd (HUL), Marico Ltd, Dabur India Ltd, Nestle India Ltd and Godrej Consumer Products Ltd (GCPL) report- ed robust revenue and profit growth as they pared expenses and raised prices.

On an average, net profit for the 42 companies grew at 25.27% in the latest quarter, compared with an 8.37% growth a year earlier. Their combined revenue grew at 19.75%, against 16.65% earlier.

Biscuit manufacturers Parle Products Ltd and Britannia Industries Ltd increased prices by 8-12% and Colgate-Palmolive India Ltd by 2-7% in May. Price rises at HUL, India's largest consumer goods company by sales, contributed 6% to its quarterly revenue.

“I expect inflation pressures to remain at least for another six months and there would be another 7-8% price increase in the coming quarters”, said Swati Gupta, analyst at AC Choksi Share Brokers Pvt. Ltd.

The price increases, however, could slow volume growth.

After five quarters of double- digit growth, HUL's volume growth slowed to 8% in the June quarter. Dabur's volume growth slowed to 8.6% from about 12% in the past couple of years. During the quarter, Dabur raised prices by about 6%.

“So far, the growth in consumer packaged goods companies had been driven by volumes largely,“ said Sameer Narang, an analyst with HDFC Securities Ltd, who expects the price hikes to contribute more to revenue growth.

The price increases are un- avoidable in an inflationary environment, said Adi Godrej, chairman, GCPL, adding that more hikes will be seen in the ongoing quarter as well.

“The drop in operating profit margins would have been much worse if companies would not have rationalized their advertisement spends”, said Himani Singh, analyst, Elara Securities India.

For instance, Dabur's operating profit margin declined by just 89 basis points (bps) as it cut the advertising budget for its domestic business by 17%.

One basis point is one-hundredth of a percentage point.

HUL reduced its advertising budget in the June quarter by 15.71% to `633 crore. This helped the maker of Surf deter- gent and Lifebuoy soaps to re- strict its operating profit mar- gin decline to 45 bps at 13.52%.

The consumer goods sector, also known as the fast-moving consumer goods (FMCG) sector, has remained a favorite of investors. In the three months ended 30 June, the BSE's FMCG index gained 12.49%, while the benchmark Sensex index lost 3.08%.

With the returning threat of a global economic turmoil, investors prefer to bet on firms riding India's domestic consumption story, say analysts.

“The sector is the flavor of the season as most other sectors have been impacted by issues ranging from corporate governance to rate increase or the global crisis”, said Naveen Trivedi, analyst at Infinity.com Financial Securities Ltd.
“FMCG is less vulnerable as compared to most others and hence a better bet than most sectors. The sector is debt- free, works on negative cash flow cycles and consumption of personal care products such as soaps and detergents can be estimated to remain constant even in a slowdown”.

Trivedi expects earnings for consumer goods companies to improve in the second half of the fiscal year as many of these have increased prices while some raw materials are becoming less expensive.

(Source-: mintlive.com)