FMCG sector may log strong Q3 volume growth

The FMCG sector, driven by increased spending during the festive season and backed by a strong economy, is likely to report strong volume growth in third quarter of the current financial year.

However, price hikes across categories, primarily in soaps and paints, to make up for raw material cost pressures, may spoil the party a bit.

The rise in vegetable oil prices is expected to hurt gross margins of HLL, tapering bottomline growth. In cigarettes, ITC effected price hikes to prepare for the impending VAT implementation.

According to a report by Edelweiss, Asian Paints' net sales is expected to grow by 15 per cent to Rs 941 crore on account increased repainting activity.

The report forecasts EBITDA (Earning before interest, tax, depreciation and amortisation) margins to be in line with last year's third quarter results. It further says that the advantages of decline in crude oil prices are expected to be reflected in next quarter results.

However, it is also possible that falling pthalic anhydrie (PAN) prices would push up operating margins from the current quarter itself.

The EBIT margins are expected to improve by 30bps Y-o-Y, as depreciation remains almost constant. EBIT is expected to grow by 18 per cent to Rs 121 crore. PAT is expected at Rs 75 crore, up 20 per cent, due to no amortisation costs this year. 
 

RETAIL REMEDIES Estimates for Q3, 2006-07 (in Rs crore)
	Net  revenues	EBIT	PAT	EPS (Rs)
Asian Paints	940.90	121.20	75.10	7.83
	(15.0)	(17.7)	(19.9)	(19.9)
Dabur	632.30	96.10	78.40	1.36
	(17.7)	(20.1)	(18.6)	(19.8)
HLL	3386.50	590.40	490.10	2.22
	(13.9)	(14.8)	(11.8)	(11.5)
ITC	2988.80	995.30	668.90	1.78
	(16.9)	(17.9)	(14.9)	(24.4)
Marico	403.00	57.10	37.60	6.48
	(32.7)	(110.8)	(71.6)	(71.6)
Note: Figures  in brackets indicate y-o-y growth in per cent Source: Edelweiss Research

According to reports, Dupont has announced a 5-6 per cent ($100) increase in titanium dioxide prices effective from January 2007. The effect of hike in price of the chemical, which contributes 15-20 per cent of paint cost, is expected to be compensated by decline in crude-based derivatives, which constitute 35-40 per cent of the cost of paints.

Dabur's net revenues, on the other hand, is expected to grow by 18 per cent Y-o-Y to Rs 6,23 crore, assuming a 44 per cent growth in foods and 15 per cent growth in FMCG products. Lower advertising expenses, due to lack of new product launches, is likely to make up for the rise in other costs, resulting in stable EBITDA margins.

A constant depreciation and rise in other incomes is expected to result in EBIT growing by 20 per cent to Rs 96 crore.

A slightly higher tax rate on account of higher MAT will result in net profit increasing by 19 per cent to Rs 78.4 crore.

Hindustan Lever's (HLL) topline is expected to grow by 14 per cent to Rs 3386.5 crore backed by strong festive season sales and price hikes in soaps. HLL's recent price hikes may just about make up for rise in input costs.

The increase in advertising costs is expected to result in EBITDA growing by 9 per cent to Rs 523.5 crore. A higher other income is expected to result in EBIT increasing by 15 per cent to Rs 590.4 crore. Higher tax rates, however, will result in net profit growing by only 12 per cent to Rs 490 crore.

ITC's net sales is likely to grow by 17 per cent to Rs 2989 crore backed by 9 per cent growth in cigarettes and a strong 30 per cent growth in hotel business.

Operating margins is expected to decline slightly due to higher proportion of sales coming from FMCG-others and agri business divisions. EBIT is expected to be at Rs 995 crore, up 18 per cent, due to higher other income and PAT at Rs 669 crore, up 15 per cent.

For Marico, Edelweiss report forecasts topline to grow by 33 per cent to Rs 403 crore. The report has incorporated a 200 bps quarter-to-quarter decline in gross margin due to hardening of copra prices. Despite this, the gross margin will improve by 215 bps.

This, coupled with lower depreciation on account of special one-time charge of Rs 3.5 crore in third quarter during their last financial year, will result in EBIT growing by 111 per cent to Rs 57 crore.