FMCG firms to maintain growth momentum

CRYSTAL GAZING

Led by higher prices and volumes, the fast moving consumer goods (FMCG) sector is expected to maintain steady growth in the quarter ended September.

The companies are likely to end the quarter with 11-20 per cent growth in sales and 10-15 per cent rise in net profit compared with the same period last year.

According to analysts, FMCG majors Hindustan Unilever (HUL) and cigarette- to-hotel company ITC may achieve a revenue growth of 11-13 per cent.

However, companies such as Colgate, Marico and Godrej Consumer Products(GCPL) are expected to surprise the Street with nearly 20 per cent jump in top line. Tata Tea may be the only exception in the sector by recording a 22 per cent dip in net profit due to rise in interest costs.

The sector overcame the challenge of rising input costs through price hikes in the quarter ended September. Yet, the impact of high input costs and increasing ad spend on gross margins will bring down earnings.

ITC's cigarette sales are expected to drop by 3-4 per cent due to imposition of value added tax (VAT) in some states. But growth in other businesses such as hotel, agri products and paper will more than offset the dip in cigarette sales, says an analyst working with a foreign brokerage.

Says Sameer Deshmukh, research analyst, IL&FS Investsmart, "The structural slowdown in HUL will lead to lower growth in Q2 as opposed to other FMCG players."

He explains that the company is a market leader in its core categories and hence growth is saturated. In addition, it is neither getting into new categories nor is it acquiring companies.

On the other hand, Colgate is expected to do well with revenue growth of about 20 per cent. Anand Shah, research analyst, Angel Broking, says, "The company is likely to witness higher margin expansion on account of lower ad spends and staff costs. Its manufacturing facility at Baddi (Himachal Pradesh) will also relieve tax pressure on the company."

Marico is expected to post 20-22 per cent growth in revenues. Its popular brands such as Parachute and Saffola are likely to continue posting strong growth of 12 per cent and 18 per cent, respectively.

GCPL is also likely to deliver 20 per cent growth owing to better returns in its soap business. Godrej No 1 soap gained market share in the quarter in the toilet soap category.

"The company is expected to face pressure in the hair colour segment. Almost two-third of the company's hair colour revenues come from powder dye, which as a category has stopped growing. Unless the company goes up the value chain, its revenues in hair care would get hit," says Deshmukh.

Dabur India is expected to see a revenue growth of 16 per cent and Nestle at 18 per cent. Tata Tea's revenue is likely to grow at 7 per cent due to sharp increase in interest costs, according to JP Morgan. The company's interest cost has gone up on account acquisitions. The company's net profit may go down by over 20 per cent.