The Hindu Business Line : FMCGs buck inflationary pressure to post volume growth

Most companies witnessed a rise in their operating profit margins (OPM) mainly due to higher volumes and implementing cost-efficient measures. For instance, FMCG giant Hindustan Lever recorded a 11.64 per cent increase in its net sales for its first quarter of 2006 at Rs 2,798.05 crore compared with Rs 2,506.38 crore in the same period, last year.

HLL improved its OPM to 14.29 per cent during the last quarter compared with 12.69 per cent, in the same period, in fiscal 2004-05.

Godrej Consumer Products Ltd on its part posted an increase of 4.64 per cent in net profit at Rs 30.16 crore for the fourth quarter compared with Rs 28.82 crore for the same quarter last fiscal.

The total income of the company rose 14.46 per cent to Rs 164.78 crore during the quarter under review, as against Rs 143.96 crore in the same period last year. However, analysts point out that increase in margins had been limited last quarter largely due to higher ad spends and increasing raw material costs particularly for the food business, even as the sector as a whole recorded growth in overall volumes and net profit.

For instance, even as Nestle India reported a 13.5 per cent increase in net profit and a 13.9 per cent jump in domestic sales, the company's EBITDA (earnings before interest, tax, depreciation and other income) as a percentage of net sales for the quarter decreased from 22.6 per cent in 2005 to 20.2 per cent in 2006 due to a steep increase in prices of commodities, especially milk solids and green coffee as well as those of fuels.

The company has also said the margins were under pressure during the period due to higher operating costs associated with upgraded formulations and manufacturing processes of the infant nutrition products. Staggered increases in selling prices and higher volumes have helped the company to keep cost rises in check.

Godrej has also expressed concern about increases in oil price affecting its margins, as the cost of soap production might increase with increasing industrial oil prices.

The company is also contemplating an increase in its product prices in a month or so.

Meanwhile, firms which saw huge increases in ad spends over the past few quarters were HLL, Marico and Colgate-Palmolive. In addition to higher advertising expenses, companies have seen inflationary trends in material costs and in some cases even in employee expenses.