The Hindu Business Line : Inflation heat has not dampened FMCG offtake

"The current level of consumer confidence is indicative that urban FMCG offtake will continue to remain buoyant, despite the setback of capital markets and higher inflation expectation."

Mumbai, July 28

The initial ripples of inflationary pressures did not seem to dampen consumer spending on daily-use products such as soaps, detergents and biscuits.

This was reflected in the June quarter earnings of most Indian FMCG majors, which were able to beat the inflation heat and come out with better-than-expected profits, driven by higher volumes and price increases.

Save for Godrej Consumer Products Ltd (GCPL), most other FMCG companies such as Hindustan Unilever, Colgate-Palmolive (India) Ltd and Marico reported an increase in net profit during the quarter as compared to the same period last year.

Analysts believe that if the Indian economy rolled along the same trajectory, these companies will maintain steady earnings in the coming quarters.

"In our opinion, the current level of consumer confidence is indicative that urban FMCG offtake will continue to remain buoyant, despite the setback of capital markets and higher inflation expectation," says an analyst with Enam Securities.

The quarter that went by was marked by price hikes across products by FMCG companies in the wake of spiralling cost of inputs, including edible oils-the price hikes were unrolled through a combination of hike in absolute prices and reduction in the weight of packs. But, despite this, most of these companies reported higher volumes.

Says Mr Harish Manwani, HUL Chairman: "Latest statistics show that consumer spending on all our category of products had grown by 14.5 per cent in the urban areas and 12 per cent in the rural areas."

However, most companies, including HUL, did face some down-trading (a consumer going for a cheaper brand in the same category) in response to the price hikes.

"We do expect a possible shifting of the consumers to lower price point products in the wake of higher prices," says an analyst with ShareKhan.

Numbers surge

Take the earnings of the top few FMCG majors. Colgate-Palmolive notched up an 18 per cent increase in net profit at Rs 71.9 crore on net sales of Rs 407 crore (16 per cent increase) during the quarter. All its major brands-Colgate Dental Cream, Active Salt, and Cibaca-contributed to the volume growth of 11.5 per cent.

Marico clocked a 15 per cent increase in net profit at Rs 46.2 crore, with more than half the growth stemming from volume expansion. Says Mr Miland Sarwate, the company's chief of HR & Strategy: "We consider it important not to get distracted by the cacophony of economic slowdown. We will think beyond the immediate quarters and strategise for long term value creation."

Similarly, HUL registered a 13 per cent growth in net profit at Rs 558 crore, mostly driven by higher volumes in personal care products.

GCPL, however, reported a 4 per cent dip in its net profit at Rs 34.3 crore despite an increase in sales revenue, mostly on account of high advertisement and promotion spends. "There was an additional Rs 16 crore A&P spends this quarter as we had Bollywood star Hrithik Roshan as the new brand ambassador for our Cinthol brand," says Mr Hoshi Press, Executive Director of the company.

Margin Squeeze

However, even though consumer spends are expected to remain stable in the coming quarters, rise in input costs will continue to put the squeeze on FMCG company's margins. Most companies will have to go for price increases, say analysts.

GCPL, for example, which had taken a 5-6 per cent price hike in its soap brands, has stated that it was planning to increase prices of its hair colouring brands by 10 per cent, with its new brand of powdered hair dye, Godrej Expert, expected to undergo the highest price increase.