Winter of discontent

FMCG FIRMS

Rising input prices continue to put pressure on operating profit margins.

A quick look at the December quarter results for the mid-sized fast moving consumer goods (FMCG) companies throws up a few worrying trends.

While the numbers posted have been fairly decent, input cost pressures have dented the margins of companies like Godrej and Colgate. The top line growth too, has been slower in some cases, than what the environment would have suggested.

While hair care player Marico did not see huge input cost increases, a substantial increase in its ad spends by 330 basis points to 13.7 per cent of revenues in Q3FY07, resulted in margins shrinking by 214 basis points.

Even Dabur, often considered an industry benchmark after Hindustan Lever has seen a slowdown in its topline growth. And while companies have managed to take price increases as consumers uptrade, these have not been enough to take care of the inflation in raw materials.

The mood though is still fairly upbeat. Says Hoshedar Press, executive director and president, Godrej Consumer Products, which has been hit by increasing palm oil prices in the soaps business, "We had taken price hikes towards the end of the quarter and the full effects will be visible in the current quarter."

Press allays concerns regarding palm oil prices saying that the company has cover for the next five months to tide over any immediate price increases. But the fact remains that higher volumes in toilet soaps don't seem to be showing up in increased profitability as it has come largely through the low margin Number 1 brand.

GCPL's hair colour business, which grew at just 15 per cent hasn't managed to keep pace with the industry growth of 35 per cent. This to an extent is the result of competition from the international brands and the company seems to be facing the heat at both ends of the market.

"While on the one hand there is increasing competition from L'Oreal and Garnier in the high value fashion colour segment, on the other side is the slowing down of incremental distribution gains from in its powder hair dye business (75 per cent of the portfolio) as also entry of players like Emami," point out analysis.

Adds Abhijeet Kundu, who tracks the sector at Prabhudas Liladhar "The growth appears to be primarily in the fashion hair colour segment where consumers tend to prefer the international brands. So Godrej may find it difficult to get a good share of the increasing consumer base,"points out Kundu.

Toothpaste maker Colgate has seen an increase in packaging costs and though it has managed to pass on a part of these, its margins have taken a huge hit. With raw material cost up 500 basis points to 45.8 per cent in Q3FY07, margins have contracted by 810bp. At Dabur, a delayed winter and some disruptions in the international business slowed top line growth somewhat.

While input costs have risen especially for products like honey, lower adspends in the December quarter have helped it improve margins by about 85 basis points.

Industry watchers are nonetheless concerned about whether the company will be able to scale up its presence in categories like toilet soaps and other personal care product categories where market leader Hindustan Lever is well entrenched.

Sunil Duggal, CEO, Dabur says that the company is betting on the foods business for growth, as well as categories like soaps and skincare. "We will look at skincare to fuel growth. Also categories like toothpaste are growing well with people switching from toothpowders. Besides, there are also more first time users coming in."

Nonetheless, industry watchers believe that input costs are likely to be an issue for companies like Marico with kopra prices being on the rise. Unless, there is another round of price hikes.

"While there are concerns about rising input prices, companies have been able to pass them on without a downturn in volumes " says an analyst.

But with competition in every category, as keen as ever, it's going to be increasingly difficult. Unless, there's strong momentum in volumes, operating margins for these players, it appears, will continue to be under pressure.