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Fast-moving consumer goods (FMCG) companies are expected to play to a familiar script in the results season that begins in a fortnight. The notable exception will be that revenue growth, estimated at 11-13 per cent for the three months ended March, will be led by price rather than volume.
Analysts tracking the sector say price-led growth for the March quarter will be six to seven per cent, higher than the three to four per cent seen in the third quarter. Volume growth, however, is not expected to exceed four to five per cent, as consumer sentiment remains tepid.
“Pricing action began in the December 2013 quarter. However, it has been a bit more pronounced in the last three months,” said V Srinivasan, analyst, Angel Broking. “This will reflect in the revenue numbers that companies will put out for the fourth quarter.”
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Source: Analysts |
In recent months, the price of inputs such as palm oil, used to make soaps, have risen 20 per cent. Similarly, copra prices, used to make coconut oil, have risen a little over 60 per cent, while linear alkyl benzene, used to make detergents, is up 10-11 per cent. It is not out-of-turn, therefore, that companies are raising product prices, said analysts.
For instance, the consumer promotions (buy one, get one free schemes) in soaps and detergents in the second and third quarters of this financial year by Hindustan Unilever, the country’s largest consumer goods company, were discontinued in the fourth quarter. The indirect price cuts through these schemes were as high as 25-30 per cent on select stock keeping units.
Similarly, Marico, raised the prices of its Parachute brand by 12 per cent during the December quarter. The company has said it will hold on to price lines in the March quarter as pressure on the wallets of consumers mounts. However, analysts say it is unlikely to be the case, with copra prices seeing the steepest rise among agri commodities in recent months.
Meanwhile, even as the price of crude oil eased to $99 to a barrel on weak Chinese manufacturing data, it is expected to pick up as the US mulls further sanctions on Russia, the world’s second-largest producer. A spike in crude prices has a cascading impact on all derivatives, including those used to make packaging material. Marico and most other companies are expected to face cost pressures on that front as well, analysts said, implying they will be unable to hold on to price lines, with both input and packaging costs up.
Margin pressures
Input cost pressures impact gross margins. In the past two quarters, gross margin expansion as a result of lower commodity costs was 400-500 basis points, helping companies cushion the impact on operating margins due to high advertising spends. “But with gross margins contracting, operating margins could erode further, with ad spends continuing to be high,” says Kaustubh Pawaskar, analyst at Mumbai-based brokerage Sharekhan.
Ad spends as a percentage of sales in recent quarters were 13-14 per cent. This is unlikely to change in the fourth quarter as competition continues to be high. Analysts estimate companies are likely to report a bottom line growth of nine to 10 per cent, a tad lower than the number (10-11 per cent) reported in the third quarter.
