Growth push

Q1 results show a turnaround in the FMCG sector

The Bombay Stock Exchange fast moving consumer goods index hit a new high last week, touching 1,365 - a rise of nearly 30 per cent since January.

A study done by a brokerage for a universe of eight stocks showed that sales for the June quarter were up 17 per cent, the EBITDA was up 18 per cent and net profit 25 per cent "" the highest growth in six years.

The first trend has been fairly good top line growth though some of it is attributable to value-added tax destocking in the quarter. This has been the case with Asian Paints having grown its sales by 27 per cent.

Companies such as ITC, Colgate and Godrej Consumer have been able to take price hikes, which shows downtrading may be coming to an end and volume growth is translating into value growth. Colgate saw a 6.4 per cent growth in sales. Competition in some segments, though, is still keen as seen from Britannia's sales numbers, which have been weak for the third consecutive quarter "" in Q1FY06, it grew just 2.7 per cent with flat volumes.

The second trend is improvement in margins, albeit muted "" companies chose to spend more on advertising to keep up the momentum.

Spends on advertising grew in double digits for almost all companies, excluding Nestle. Asian Paints' margins were under pressure from increasing raw material costs, while for Tata Tea a higher share of brand sales and lower employee costs helped margins expand by just 60 basis points.

Fiscal sops for units in backward areas have provided another boost: Colgate, Britannia and Dabur all managed better margins. Valuations at current levels are in the range of 18 to 24 times the expected FY06 earnings, while for FY07 earnings they average about 17 times. Not unreasonable given the belief that the growth momentum would continue.

Television Eighteen

Television Eighteen is expanding at a rapid pace - so much so that it has advanced the conversion date of warrants it had issued last year to garner more funds.

The company's Series A and Series B detachable warrants, issued during its rights issue last year, would normally have been converted in 18 and 36 months, beginning November 2004.

This has now been advanced to September 11, 2005 and, based on a pre-determined formula, the conversion price has been fixed at Rs 235.4 a share. The conversion price is about 38 per cent lower than Television Eighteen's current stock price.

Investors were issued one equity share at Rs 160 last November, along with two warrants, for every 12 shares held in the company. With the stock trading at Rs 380, the value of shares acquired through the rights has more than doubled.

If investors convert the warrants into shares at Rs 235.4 a share, they would make a gain of about 37 per cent on each share acquired through the conversion.

That is based on the assumption that current valuations would hold and that the stock would only correct to the extent of the equity dilution of about 15 per cent on account of the conversion.

Needless to say, participants in the rights issue have gained handsomely. Investors entering at current levels, however, need to be wary given the current valuations of about 19 times forward earnings.

Supreme Industries bounces back

The Supreme Industries stock was up 20 per cent in Tuesday trade, thanks to investors' expectations that the earnings momentum in the medium term should be provided by the board's decision to develop the company's property in Mumbai and at Salt Lake, Kolkata.

That is in sync with the market's current infatuation with all those companies, which have sizable properties like Bata and Bombay Dyeing.

Meanwhile, Supreme Industries has reported a 45.6 per cent growth in its earnings before depreciation and tax to Rs 23.59 crore in the June quarter, despite net sales growing merely 10.31 per cent to Rs 246.4 crore.

Profit growth has been aided by other income, which has zoomed 474 per cent to Rs 5.69 crore, largely owing to enhanced treasury income.

In contrast, in the first nine months of its financial year ended June 2005, the company's EBDT fell 12.39 per cent to Rs 41.41 crore, on the back of a 1 per cent dip in net sales coupled with higher employee costs.

Sluggish growth in sales was attributed to weak offtake for packaging products such as rigid PVC film, point out analysts.

However, in the June quarter, Supreme Industries' sales bounced back on a y-o-y basis, thanks to improved performance from its plastics piping division and plastics moulded furniture business. However, rising prices of inputs such as polymers pushed up raw material costs 7.9 per cent in the last quarter. Also, other expenditure grew 24.75 per cent to Rs 49.6 crore.

As a result, operating profit was more or less unchanged at Rs 23.69 crore in the June quarter, but operating profit margin fell slightly, to 9.63 per cent.

The company's margins are expected to improve given that international polymer prices are lower on a y-o-y basis. Hence, the expected sales growth is likely to flow into its bottomline.

With contributions from Shobhana Subramanian, Mobis Philipose and Amriteshwar Mathur