FMCG firms sustain growth in December

Results of fast moving consumer goods (FCMG) companies declared so far reveal that most have managed to sustain growth in the third (October-December 2009) quarter, beating street expectations. Average growth in net sales was 14 per cent, while net profit grew 24 per cent during the period, according to analysts.

The accent was clearly on volume growth, which surged 15-18 per cent, despite lower consumer offtake. Consumers were mainly downtrading (settling for lower-priced products), especially in categories such as soaps, detergents, tea and edible oil, in the wake of spiralling food prices which ate into monthly household expenditure.

Companies basically resorted to price cuts and value packs to arrest downtrading, says Shirish Pardesi, senior analyst at Mumbai-based brokerage Anand Rathi. This was especially true of those whose basket of inputs did not comprise agri-commodities (sugar, wheat, milk, etc). On a year-on-year basis, prices of inputs like edible oil, palm oil and crude fell by 25-30 per cent. "It was easier, therefore, for these companies to take price cuts," he explains.

On an average, price cuts taken by players ranged between eight and 10 per cent. Quite a few did not hesitate to slash product prices in key categories. Such as Marico, which brought down prices of recruiter packs of its flagship brand, Parachute. Hindustan Unilever and Tata Tea launched value packs to address downtrading.

Analysts maintain downtrading will continue into the fourth (January-March) quarter, as will benign input costs, though the volatility in crude prices could pose some concern. Milind Sarwate, chief of finance, human resources & strategy, Marico, says: "We expect packaging costs to go up 5-10 per cent in the coming months.”

What also helped companies in the quarter under review was lower excise. If revised upwards, this could impact profitability in the fourth quarter. "The budget is a few weeks away. Let's see what the finance minister has to say on the subject," says an executive with an FMCG company.

Saving both on the excise and input-price ends meant companies were able to plough back some amount into advertising and sales promotions. On an average, the increase in such expenditure was about three to five per cent in the third quarter, say analysts.

Given the competitive landscape, however, most companies are likely to keep their spending levels high in the fourth quarter as well. This was articulated recently by R Sridhar, chief financial officer of Hindustan Unilever. He said, "Ad spends could remain high in the coming months as well." Hindustan Unilever's ad spends in the October-December quarter rose by 66 per cent, the highest in recent times for the company.

Analysts say the overall media push has increased the brand investments of firms, which is not likely to taper, as the north goes in for an extended winter. "That would only mean the sales of personal care products would go up," says Anand Shah, analyst at Angel Broking.