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Consumer companies’ earnings for the quarter ended September have ignited hopes of a revival in consumer demand in India. After decelerating for about two years, consumer goods makers reported higher growth in revenue and profits during the quarter. Growth in net sales for the 15 companies in our sample list rose 11.4 per cent on a year-on-year basis in the September quarter, against 10 per cent in the preceding quarter and 11.5 per cent in the March quarter. The report card on profits is even better, with most companies in the sample list reporting an improvement in operating margins, as revenue growth outpaced expenses.
Operating profits rose 17.5 per cent, the most in the last five quarters, showing the pricing power these companies enjoyed. Excluding the impact of other income and other operating revenues, core operating profits increased 18.1 per cent, the most in the last four quarters. This reflected in the operating margins, which touched an eight-quarter high of 24.4 per cent of revenues. Some of the companies in our sample include ITC, Hindustan Unilever, Dabur, Shoppers Stop, Colgate-Palmolive, Asian Paints, Whirlpool India, TTK Prestige, Marico, Arvind and Raymond. (GOOD TIMES AWAITED)
Analysts attribute this to the companies’ pricing power and continued demand momentum in rural areas. “Unlike urban consumers who have been forced to take tough choices due to poor salary hikes, the weak job market and EMI (equated monthly instalment) compulsions on consumer or home loans; rural households face no such constraints and continue to splurge on branded products,” says Abneesh Roy, associate director (institutional equities research), Edelweiss Securities. The momentum is likely continue during the second half of the year, considering the good monsoon, a likely bumper harvest and its cascading impact on household incomes in rural areas.
The highest gains accrued to companies with deep sales and distribution networks in rural areas, besides the right product basket. This favoured category leaders such as Asian Paints (revenues up 18 per cent annually), Dabur (15 per cent), Arvind (30 per cent), Colgate-Palmolive (15.8 per cent), Emami (12.8 per cent) and Hindustan Unilever (9.6 per cent).
Premium players and those selling big-ticket items such as consumer durables found the going difficult, as urban consumers spent less or down-traded to cheaper brands.
“The revenue and profit growth varied greatly from one company to another, depending on their product portfolios, geographical presence and ability to create demand through various means,” says a consumer analyst at a leading brokerage firm in Mumbai, on condition of anonymity.
Lack of secular demand growth forced companies to increase spends on brand promotion and advertisements, which hit their profitability. Colgate-Palmolive raised its brand spend 35 per cent in the second quarter, resulting in a 24.5 per cent fall in net profit.
The corresponding ratios for Hindustan Unilever and Dabur were 24.1 per cent and 25 per cent, respectively. These companies, however, minimised its impact on net profits by saving on other costs such as those on raw materials. For others, there were more misses than hits.
“At first glance, numbers might look good, as most companies reported higher margins. But volume growth continued to slide. This raises a question mark over their sustainability. Except Asian Paints, none of the companies are doing well. Some slipped on volumes, while others disappointed on profits,” says another analyst.
Others compare revenue growth with the underlying growth in gross domestic product at current prices to point towards the challenges that lie ahead for consumer good makers. “Including consumer inflation of nine-10 per cent, demand in the economy is growing 13-14 per cent in nominal terms. Given revenue growth has been lower, continued volume slippages are likely. Few companies may find ways to outperform, but this wouldn’t change the demand dynamics for the industry,” says Dhananjay Sinha, co-head (institutional equity), Emkay Global Financial Services.
