- Enhanced focus on volume growth: With sales volume as the only top line driver in FY2010, as the inflationary scenario is behind us, fast moving consumer goods (FMCG) companies have increased their focus on volume growth. This is more so as profit margins, which were under severe pressure in FY2009, are expanding with substantial cooling of raw material prices and lower excise duties. We believe volume growth and market share conservation/improvement are going to be the focal point for companies across the FMCG spectrum. Towards this end, FMCG companies have resorted to price reduction/grammage increase/discount offering/ promotional offers over the past six months. We believe, these efforts along with government's focus on boosting the spending power across strata of population would help to maintain the demand growth traction for FMCG products.
- Profitability to improve on lower raw material prices: For Q1FY2010, we expect FMCG companies across the board to post far higher growth in operating profit compared to growth in sales. This is due to expansion in margins emerging primarily from input-cost correction. Copra, sunflower and kardi oil prices (key inputs for Marico) in Q1FY2010 are down by 18.2% year on year (yoy), 32.4% yoy and 14.0% yoy respectively. Though the prices of palm oil (key raw material for Hindustan Unilever Ltd [HUL] and Godrej Consumer Products Ltd [GCPL]) and other crude derivatives have run up sharply from their lows, the prices are still low on a year-on-year basis. The companies will also benefit from low-cost inventories of raw materials. Thus we can see significant improvement in the margins of FMCG companies in Q1FY2010. However, there are some exceptions like Tata Tea that is bearing the brunt of higher raw (auction) tea prices in the domestic as well as international markets.
- FMCG demand on strong footing, monsoon to be critical: Even in a comparatively difficult macro economic scenario, rural markets have been witnessing buoyancy due to higher prices of farm products, schemes like rural employment guarantee and debt waivers. Enhanced focus of the government on improving rural incomes through various pronouncements in the Union Budget 2009-10 like sharp increase in allocation under National Rural Employment Guarantee Scheme (NREGS) and Accelerated Irrigation Beneficiary Program AIBP), augurs well for maintaining the momentum in rural demand. Also, the increase in exemption limits of Income Tax on personal income and removal of surcharge on personal income would leave more spending power in the hands of urban consumers. Increased salaries post the implementation of the Sixth Pay Commission's recommendations is also an important booster for ensuring sustained growth in FMCG demand from urban/semi-urban consumers.
- With all human efforts in the right direction now it is the rain Gods that can make or break the buoyant demand environment. While the country has witnessed substantial shortfall in monsoon in June, progress of the monsoon in the peak sowing season of July/August remains the key monitorable for the sector and the economy as a whole. While a strong revival of monsoon is desirable, expectations are that July/August will receive far better rains compared to the last year.
- For Q1FY2010, while we expect bottom line growth of all FMCG companies to be strong driven by margin expansions, we believe GCPL and Marico will outperform peers on both sales and profit growth fronts. We believe Tata Tea will deliver the weakest performance in Sharekhan FMCG universe as the trend of relentless increase in raw material prices will dent its margins on a year-on-year (y-o-y) basis.
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