Slowdown grips FMCG sector

Price war, stiff competition to take heavy toll on market leader HLL

M S 'Vindi' Banga's last statement of results as HLL chairman is expected to be a damp squib. The sector analysts are not expecting the company to post earth shattering results.

Analysts tracking the sector are of view that the recent price wars and intense competition put up by smaller, regional players have clearly taken a heavy toll on the FMCG sector, and market leader HLL in particular.

Looking at the aggressiveness of the listed companies such as ITC and P&G and the imminent entry of the new and small regional players, the situation is turning grim for HLL.

Analysts expect the FMCG sector's year-on-year sales growth to average around 6.6 per cent and its earnings before interest, depreciation, tax and amortisation (EBIDTA) to rise 5.7 per cent, as the full impact of the price wars will be felt only in the next quarter. HLL is widely expected to report flat growth in the quarter ended March 2004.

Nikhil Vora, vice president, research at SSKI Securities said: " HLL results are expected to be seaded and will not provide a major momentum to the stock. I expect HLL's revenue to grow one per cent while the operating profit may be two per cent lower on a year-on-year basis.

SSKI, in its recent research report on the FMCG sector, had said: "the sector is in the grip of a secular slowdown, and we see no sign of a revival."

Distribution levels are reaching saturation, while intense competition has put prices under pressure. This means that companies would have to learn to live with reasonable operating margins and slow growth.

The competitive pressures within the consumer business are unlikely to recede.

Valuations continue to remain at a substantive premium for a business which is likely to attract 'quality' competitive pressure, and one which continues to reel under price deflation.

Yasmin Shah, FMCG analyst with ASK Raymond James said, "After the price cuts, HLL's margins and of others will be squeezed.

Since the price wars flared up at the end of the quarter (the last month), the full impact will be felt only in the next quarter. For this quarter, therefore, I expect margins to remain marginal."

Analysts expect HLL's net profit year-on-year to decline by 5.5 to 6 per cent, while revenues may grow by a marginal one per cent.

The margin concerns have resulted in the FMCG sector underperforming the key indices on the bourses as well. Barring a few individual stocks, most FMCG stocks have seen negative trend in the last three months.

While the HLL scrip has been among the worst performers in the Sensex basket crashing nearly 25 per cent in the last three months: from Rs 193.10 on January 28 to today's close of Rs 144.85.

The other big losers were Britannia Ind, down 6.95 per cent to Rs 616, GlaxoSmithKline Consumer down 11.79 per cent to Rs 264.50, Colgate-Palmolive down 15.44 per cent at Rs 128.19, Dabur down 15.11 per cent at Rs 75.55, and Gillette India,down 23.73 per cent to Rs 544.45 during the same period.

Nestle India too has lost over 3.5 per cent in the last three months to yesterday's close of Rs 635.40 as against Rs 660.40 on January 28, 2004.