The Hindu Business Line : Despite positive quarter FMCG sector awaits revival

ONCE the dust has settled on the September quarter results of major fast moving consumer goods (FMCG) companies, it is becoming clear that while the revival process may have begun, the sector has still a long road ahead to complete recovery. And while analysts do not foresee large-scale price corrections, they say it is early days yet to pop the champagne.

What could turn out to be party poopers are factors such as sustained inflationary pressures that could lead to more price increases and further competition to the market leaders from the smaller, regional brands.

Also, most FMCG companies have set up manufacturing facilities in excise-free zones so that short-term profitability indices moved up, but this trend may not be sustainable in the long run unless leveraged to achieve economies of scale.

An analysis of the September quarter results of the sector by SSKI Securities shows that there has been overall revenue growth of 10 per cent and net profit growth of 17 per cent during the last quarter, but these numbers are valid only if one excludes Hindustan Lever Ltd (HLL).

Taken together with HLL, the sector has actually de-grown, with net profit growth down by 90 basis points to 16.3 per cent.

Among the chart toppers are ITC, Tata Tea and Britannia with 13 per cent growth each in sales during the quarter under review. HLL reported three per cent drop in net sales, whereas Nestle and Glaxo SmithKline recorded low single digit growth rates.

In terms of net profit, Tata Tea's surged 55 per cent followed by Britannia, Dabur and Godrej Consumer Products; HLL saw a significant 27 per cent decline, whereas Nestle and Gillette both witnessed a nine per cent fall. And enthused by overall September quarter results, SSKI has in fact upgraded the rating of FMCG sector from `under performer;' to `neutral.'

However, overall concerns remain. Says Vice-President (Sales) at Dabur India Ltd (DIL), Mr S. Raghunandan, "While market leaders have begun to contend with the price competition regional players offer, there is still a long way to go in terms of the sector's overall recovery."

Erratic monsoons together with steadily rising commodity prices have already pushed several FMCG players to reverse price corrections and this trend is expected to continue for at least the remaining three months of the year.

DIL has already announced price increase for its Vatika hair oil products and HLL increased Clinic All Clear shampoo prices. Several other companies are expected to follow suit.

Also, the industry needs to reorient its communication strategy as well.

Says Gillette India's Managing Director, Mr Zubair Ahmad, "FMCG brands need to appear more `happening' to the consumer. Today, the consumer is neither short of money nor of options and instead of FMCG, disposable income is being used to buy mobile phones, apparel and other lifestyle brands."

He said there could still be price corrections, but these would be limited to categories that have little product differentiation.

Undeterred by the sceptical market, Korean major LG has just launched FMCG products in the country, with the December quarter to be its first report card.

Mr Vijay R. Singh, Vice-Chairman of India Household and Healthcare Ltd, the sole licensee of LG Household and Healthcare Ltd, said the company was expecting Rs 20-25 crore sales turnover this quarter with its premium priced products.

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