FMCG: Weak quarter

Low sales growth could dent profit figures in September.

September is likely to be a weak quarter for most FMCG players, who might see a low double-digit rise in profits despite 16-17 per cent (y-o-y) growth in their top lines.

Given that the growth in net profit during the June quarter was nearly 20 per cent y-o-y, this could be bit of a disappointment.

In the current strong economic environment, most companies should post at least 14-15 per cent y-o-y growth in sales. Interestingly, the top line growth in the June 2007 quarter was 15 per cent y-o-y, while for FY07, it was just 12 per cent y-o-y.

The percentage of raw materials to sales remained stable as most companies managed to pass on the input costs in the June quarter.

To that extent, companies' high raw material prices and other spends, for instance on advertising, will mean that operating profit margins remain flat or see a slight growth.

The sector could turn in a lower rise at the net profit mainly because of the lower sales growth. As a whole, the sector is trading at valuations of about 20 times FY08 estimated earnings and about 16-17 times FY09 earnings.

In the last six months, the BSE FMCG index has risen by about 23 per cent vis-a-vis 38 per cent for the Sensex. In other words, it has underperformed the broader market.

Two heavyweights "" ITC and Hindustan Unilever "" which account for the better part of the FMCG index's weightage, posted returns of 20 per cent and 12 per cent respectively.

Given that purchasing power remains intact, some stocks could be outperformers especially if investors wish to move into a defensive sector at this time.

Pharma preview: Re blues

The September 2007 quarterly results for the large generic players such as Ranbaxy, Dr Reddy's Laboratories and Cipla are expected to be lacklustre given the high base effect in the previous year, coupled with the continued surge in the rupee vis-a-vis the dollar, highlight analysts.

For instance, Ranbaxy's revenues are expected to grow merely 4-6 per cent y-o-y in the last quarter, given the high base effect in the corresponding period of the previous year due to its 80 mg simvastatin tablet, which had enjoyed a 180-day exclusivity.

No doubt, the company is focusing on expanding its generic sales in other fast growing markets, but its operating profit is also expected to improve only marginally in the September 2007 quarter, analysts said.

Meanwhile, sales of Dr Reddy's are forecast to decline by 35-40 per cent y-o-y in the last quarter due to an absence of authorised generic revenues.

Analysts also expect the company's operating profit to decline 45-50 per cent y-o-y in the September 2007 quarter, largely because of higher sales and marketing expenses.

Other large generic players like Cipla are forecast to see their sales improve by 8-10 per cent y-o-y in the last quarter, but a surging rupee curtailing realisations in the local currency is expected to result in the company's operating profit declining by 30 per cent y-o-y.

Among MNC pharma players, GlaxoSmithKline Pharma is anticipated to grow its sales by 5-7 per cent y-o-y in the last quarter, given the sale of its animal health business on July 31, 2006 to Virbac. Also, its operating profit is expected to improve by about 5 per cent y-o-y in the last quarter, say analysts.

Ranbaxy trades at a reasonable 9 times estimated CY07 earnings, while Glaxo Pharma and Cipla trade at 25 times estimated CY07 and FY08 earnings respectively.

With contributions from Shobhana Subramanian and