Fast moving consumer goods (FMCG) companies will continue to witness pressure on their operating margins in the fourth quarter ending March 31, 2009, despite falling commodity and raw material prices and benefits such as a 4 per cent excise duty cut.
With the slowdown in the economy, the trend of consumers downtrading in consumer durables goods and apparel is already evident. Besides, the market for soaps and detergents has also contracted in the December quarter.
“In order to maintain volumes, FMCG companies are expected to increase their value offerings and promotions. Firms may also effect large competitive price cuts to increase volumes. All this will keep the gross margins under pressure in the coming quarter,” says Abheek Singhi, partner and director, Boston Consulting Company.
The growth last year, especially in the December quarter, was led by value due to increasing input costs, wherein most FMCG firms had effected price increases of 10-15 per cent on an average. Growth in volumes, on the other hand, was in the range of 5-8 per cent.
“FMCG companies saw slight marginal improvement and top-lines are robust,” says Anand Shah, sector analyst with Angel Broking. “Due to the slowdown, there could be some impact on volumes in the coming quarters. The value growth will also be marginal due to falling commodity prices and input costs,” Shah added.
For instance, over the last 15 months, Hindustan Unilever (HUL) effected a 15-18 per cent cumulative price hike across products. It is unlikely that the company will increase product rates this year. In fact, it has already reduced prices and increased the grammage of key stock keeping units in the mass and mid-consumer segments as it passed on the benefits of the excise duty cut to drive volume growth.
Those companies, which had not effected a price rise, had to face considerable pressure on their margins. For instance, Colgate Palmolive had recorded a 14 per cent volumes growth in the December quarter. However, according to the HSBC Global Research, the gross margins for the period had contracted 355 basis points year-on-year.
ITC, which garners 21 per cent of its revenues from the FMCG sector, will continue to make losses in the second half of FY09, according to analysts from DSP Merill Lynch. “Contrary to our earlier expectations, FMCG losses in the second half of FY09 are unlikely to be lower as compared to the first half,” says the report.