Fast Moving Consumer Goods: Input cost blues

Sales have moved faster. But the surge is not getting reflected in the numbers.

It is a curious situation. According to market research firm AC Nielsen, FMCG sales in the country grew from Rs 58,561 crore in 2005 to Rs 71,294 crore in 2006, a rise of 21.74 per cent. In the January-March quarter this year, the figure stood at Rs 19,595 crore -"� an indication that this year could be much bigger.

However, the results reported by FMCG companies in the quarter ended March this year are, at best, a mixed bag.

The sector clocked double digit growth for the third consecutive quarter, but yet again underperformed the corporate sector, which posted a strong 30 per cent growth in sales and 42 per cent in net profit.

Seven FMCG companies that manufacture personal care and food products -- Hindustan Lever, Nestle, Colgate-Palmolive, Marico, GlaxoSmithkline Consumer, Procter & Gamble and Godrej Consumer -- posted a 13.4 per cent rise in net profit on the back of 16.61 per cent growth in sales.

The margins continued to be under pressure on rising input costs. The price of palm oil, a key ingredient in toilet soaps, has increased 20 per cent in the last three months. Hindustan Lever, the biggest player in soaps and detergents, reported net profit growth of 13.56 per cent (before factoring in exceptional items), although analysts were expecting 19 per cent.

As copra prices soften, analysts expect a slight improvement in the margins for companies like Marico, which owns leading coconut oil brand Parachute. In the last quarter, Marico reported a profit increase of 1.6 per cent and its 13.53 per cent operating profit margin was the lowest among the seven that have declared results so far. But analysts predict that, in the future, the company will enjoy better margins.

To combat the rise in raw material prices pressures, the industry has been increasing prices. HLL, for instance, has increased the prices of detergents by 3-5 per cent, while Godrej Consumer has increased powder hair dye prices by as much as 12.5 per cent. GSK consumer has increased malted beverage prices by 1.5 per cent.

"Price increases combined with cost-cutting will help the companies maintain their margins," says an analyst. However he adds that it might be difficult to improve margins because the price hikes are inadequate to counter the full impact of the rise in raw material prices.

Analysts add that there could be blips like a cutback in consumer spends because of higher interest costs that can affect consumption in the short term. But that will not hamper long-term performance, as consumption will boom due to economic growth across rural and urban India.

Procter & Gamble continued to be the lame duck last quarter with single-digit growth in net sales and and a decline in net profit of 19.3 per cent on account of a 35 per cent rise in raw material costs. Marico and Nestle posted robust growth in sales while Colgate scored over others in terms of profit growth.

The volume growth was far from encouraging in non-food FMCG categories, but foods raced ahead. The growth of non-food FMCG categories was in the range of 13 per cent in the quarter under review (compared to 20 per cent in 2006). Meanwhile, for foods companies like Nestle, net sales grew by 28 per cent. Even HLL's foods portfolio registered growth of 23 per cent in comparison to only 10 per cent in its home and personal care portfolio.