Q4FY2009 FMCG earnings review

• The Q4FY2009 results of the fast moving consumer goods (FMCG) companies were highlighted by gains in the operating profit margin (OPM) on the back of a decline in the raw material prices and a squeeze on the advertising spend. However, as far as the volume growth is concerned, the mid-tier companies clearly outperformed the biggies. While Hindustan Unilever Ltd (HUL) and ITC posted dismal sales volumes (that pulled down their top line substantially), companies like Godrej Consumer Products Ltd (GCPL), Dabur India, Colgate Palmolive India and Marico maintained the strong momentum in their volume growth. 
• For the quarter the biggies HUL and ITC have reported a sales growth of 6% and a decline of 2.8% year on year (yoy) respectively. The overall net sales of the Sharekhan FMCG universe are up by just 4.0% yoy for Q4FY2009. However, the year-on-year (y-o-y) increase in the OPM has led to a 17.1% y-o-y growth in the operating profit while the adjusted net profit has grown by 12.0% yoy. 
• As HUL has resorted to price cuts/grammage increases/discounts (facilitated by a lower raw material cost), we expect the company's volumes to pick up going ahead. With the rural markets showing buoyancy in demand, most FMCG companies have hinted at garnering a larger pie of the growing market by strengthening their distribution network, improving penetration of their products and allocating a bigger part of their overall advertising spend for the rural markets. However, we believe the monsoon is the most critical factor that will decide whether the rural demand will sustain. Hence, the delay in the arrival of the monsoon and eventually a subnormal monsoon are the key risks for the agrarian economy and the FMCG companies.
• The second half of FY2009 witnessed a sharp correction in the prices of the raw materials (except raw tea) for major FMCG categories from soap and detergents to edible oils. Thus, one should expect significant benefits in the form of expansion in the margin of the FMCG companies or price reduction in some key consumer goods categories to boost volumes. However, the prices of palm oil (a key raw material for HUL, GCPL) and crude oil have started showing an upward trend from the start of Q4FY2009. If this trend continues, it could limit the gains expected from the drop in the palm oil prices in the later part of FY2010. 
• In the quarters ahead, the key things to watch for with relation to the FMCG companies in the Sharekhan universe are: (1) the volume growth in the soap & detergent segment of HUL; (2) the volume growth in Marico's flagship brand, Saffola; and (3) the impact of the mandatory pictorial warning and budget provisions on ITC's cigarette sales volumes.