FMCG: Brewing gains

In addition to robust volume growth, price increases will provide support to margins in a rising input cost scenario.

Aggregate sales of top-10 fast moving consumer goods (FMCG) companies are expected to grow around 17 per cent year-on-year (y-o-y) in the September quarter to Rs 18,210 crore. In addition to the consistent volume growth in the past several quarters, the sector is likely to benefit from the recent price increases. Sales are likely to grow five per cent sequentially during the September quarter, higher than the 3.5 per cent in the June quarter.

The operating profit margin (based on aggregate figures) of FMCG companies is expected to drop marginally by 75 basis points (bps) y-o-y to 21.5 per cent as the rising cost of crude oil-linked raw materials will be compensated by a stable-to-declining trend in agri-based inputs like sugar, wheat and milk. The net profit margin is expected to decline 88 bps y-o-y to 15.1 per cent.

The sector will also benefit from good monsoon (two per cent above normal), which will lead to higher rural spending. Lower agri-based input prices will benefit margins. The full impact of price rises in the September quarter will only be visible in the second half of the current financial year.

However, investors need to keep a watch on margins of companies dependent on crude oil-linked raw materials like titanium dioxide, palm fatty acid, LAB and soda ash. Entry of new players is also intensifying the already competitive sector, which will keep advertising budgets high.

Though analysts are gung-ho about long-term business prospects, they have turned underweight on valuations. Year-to-date, the BSE FMCG index has been the second-best performer after BSE Bankex, registering a gain of 33 per cent compared to Sensex’s 15 per cent rise. Consequently, the sector’s average one-year forward price-to-earnings multiple of 24xFY12 estimated earnings has crossed its long-term average of 22x.