While the move to raise prices is a positive, it will only be able to cover the increase in input costs.
The stock markets cheered the price hikes by Hindustan Unilever (HUL) and Marico, with a majority of stocks in the FMCG (fast moving consumer goods) Index rising one-four per cent on Wednesday. Godrej Consumer Products rose the most (almost four per cent) to touch a new high of Rs 402.95 before settling a little lower. Analysts reckon the company will benefit from its move to raise soap prices by five-six per cent. However, it is still not time to celebrate, as valuations of FMCG stocks are not cheap and concerns on the margin front persist.
While there has been a rise in input costs across the board for the past several quarters, be it palm oil prices (input for making soaps), copra (hair oils), wheat (biscuits, aata), sugar (chocolates), linear alkyl benzene (detergents) or high-density polyethylene (packaging), many companies saw their advertising spends rise in the recently-concluded quarter.
However, companies did not pass on this rise to consumers due to stiff competition and focus on volume growth. This affected operating profit margins, which saw an erosion of up to 50 basis points in the June quarter, despite robust sales growth of 13.5 per cent (aggregate for top 10 FMCG companies).
For now, analysts believe the price hikes, including the ones companies are planning over the next few days, are likely to cover only the increase in input costs. Hence, they do not assure the return of pricing power to companies. Moreover, competitive pressures persist, which may keep advertising expenses high. Positively, input prices are unlikely to rise from here due to good monsoon and softening inflation. Thus, at best, operating profit margins can be maintained at the current levels. The impact of price hikes on volume growth will also be keenly watched, as any sharp increase in prices may hurt sales, say analysts. Thus, not much has changed fundamentally for the FMCG sector.
Analysts are also not comfortable with the sector’s valuations at an average 2011-12 price to earnings multiple of 23 times. They advise picking only stocks that have a strong hold in their core categories. They recommend accumulating stocks like ITC, Nestle and Colgate among the larger players and Marico, Dabur and Emami among the relatively smaller ones.
