The Hindu Business Line : Still strong and steady

Your fuel bill may be swelling and your home loan instalment may just have become heftier. But, it’s not as if people have stopped buying their items of daily consumption. They are, indeed; those with deep pockets are buying the high-end brands while the budget-conscious could well be buying cheaper in these trying times. And the sense of gloom all around has not had an impact as yet on makers of fast moving consumer goods. Sales numbers from FMCG companies for the quarter ended June 30, 2008 have been surprisingly healthy.

Take the case of FMCG behemoth Hindustan Unilever Ltd (HUL). While declaring its results for the June quarter recently, Harish Manwani, HUL Chairman, said, “Building on the strong start to the year, we have sustained the growth momentum in this quarter. In the context of high cost inflation, the business is being managed dynamically using all the available levers — cost management, enhanced mix and judicious pricing. We remain committed to sustaining the long-term competitiveness of our business and value creation for shareholders.”

Surprising analysts with its numbers, HUL has managed to get on track with its FMCG business reporting a 21 per cent sales growth in the June quarter. Its soaps and detergents business grew by 21 per cent, personal products by 19 per cent and foods business by 14 per cent. “There has been phenomenal sales growth for HUL, the best in the past five years. HUL has surprised us with revenues surging by 21 per cent at Rs 42 billion (Rs 4,200 crore) in the first quarter with an underlying volume growth at 8.3 per cent,” says Nikhil Vora, Managing Director, IDFC-SSKI Securities, in his report on the company.

With no significant signs of downtrading among consumers, HUL also believes that higher disposable incomes in times of inflation have helped the company manage strong sales growth. As Manwani says, “There is no significant downtrading at this stage. One must realise that consumer incomes are also going up and that the urban top end is growing equally well as is the lower end. So while laundry brands like Surf Excel continue to do well at the top end so does our Wheel brand at the lower end.”

At the same time input cost inflation is a reality and most companies have decided to implement price hikes to cushion the impact. For instance, Godrej Consumer Products Ltd (GCPL), faced with escalating prices of vegetable oil, continues to hike prices on soaps to beat cost-related margin pressures in its FMCG business. The company reported a marginal dip in standalone profits this quarter despite healthy sales growth. In a statement, Adi Godrej, Chairman & Managing Director, GCPL, said, “Over the last 18 months we have seen vegetable oil prices on a continuing uptrend to impact profitability, compelling us to look at the possibility of increasing prices of our toilet soaps.” So while GCPL has hiked prices for its soaps between 5 and 6 per cent, it is now effecting further hikes for its hair colour brand (by 10 per cent) to protect margins. GCPL attributes the 4 per cent dip in its net profit this quarter, to high input costs and extraordinary advertising and promotion (A&P) spends. Even in the case of Tata Tea, its standalone profits were lower by 9 per cent and the company has attributed it to increased commodity prices and input costs coupled with high A&P spends.

Meanwhile, in spite of higher input costs and margin pressure in its coconut oil franchise, Marico Ltd has recorded a 15 per cent increase in net profit. In a statement Saugata Gupta, CEO (Domestic Consumer Products Business), Marico, said, “In an uncertain and difficult macro environment, we have focused on growth in our consumer franchise. Such growth may come at a higher cost than before, but the investment would pay for itself in the long run.” As Vora of SSKI says in his report, “We continue to like Marico’s business model as it transitions from a pure FMCG company to one with multiple growth avenues in the form of Kaya Clinics and additional triggers in the form of its overseas acquisitions. However, we believe operating margins will continue to be under pressure as the core operations of oils will be impacted by higher input costs (copra prices up nearly 30 per cent year-on-year) and the costs related to the expansion of the Kaya franchise.” Marico, too, is gearing up for another round of price hikes for its flagship brand Parachute after taking a 3 per cent rise in price for the brand in the recent past.

Meanwhile, the larger FMCG players such as Dabur and Britannia continue to record healthy numbers for the quarter, negating the impact of inflation on their sales. While Dabur reported a 25 per cent increase in net profit, Britannia also had a double-digit increase in net profit at 11.6 per cent. As for Dabur, it has attributed its numbers to its aggressive cost-saving initiatives along with the turnaround in its consumer health division. While declaring the results, Sunil Duggal, CEO, Dabur India said, “We continued to sustain the growth momentum in key categories like hair care and health supplements, despite growing cost pressures. While high inflation is a cause of concern, we have not yet seen any significant impact on consumer spending.”

Dabur has benefited from a wide product portfolio and a slew of re-activation initiatives. Sourcing strategies which have contained costs and judicious price increases have helped Dabur, as has the turnaround in its consumer health division. Meanwhile, toothpaste major Colgate Palmolive has notched up an 18 per cent increase in net profit with all its major brands – Colgate Dental Cream, Active Salt and Cibaca – contributing to a volume growth of 11.5 per cent. But input pressures would continue to gnaw at its margins. As analyst Anand Shah of Angel Broking observes, “Escalating input costs, particularly the inflationary trend in packaging material coupled with high advertising expenses, would remain a key risk to the company’s margins.”

Amid a strong set of numbers from most FMCG players, ITC’s numbers have been a trifle disappointing. Excise duty hikes on the core cigarette business along with the high cost of entering new categories in the FMCG business appear to have triggered the dip in net profit at ITC. The company attributes it to a host of factors ranging from brand-building costs to steep rise in commodity costs and high rentals to the slapping of excise duties on its non-filter cigarettes. As Vora of SSKI says, “ As ITC enters the front-end consumer businesses like soaps and shampoos, well entrenched by the likes of HUL and P&G, we believe the current losses are an indication of the cost of being in a more competitive business. As market share gains in these segments come at a high price, incremental returns from these investments would only reduce.”

A report from Enam Securities describes the current status of the FMCG industry as ‘a classic defensive growth story’. According to the Enam report, it is only when there’s a sustained domestic economic slowdown that India’s consumer sector de-grows with a lag. While consumer durables and capital goods react immediately to any economic slowdown, the FMCG sector continues to be robust — which is exactly why it’s had the best defensive premium over the last few months of economic slowdown fears. Of total consumption growth, 80 per cent is due to rising household income where there’s no evidence of slowdown yet and 16 per cent is due to middle class population growth which is secular in nature. Going ahead, increasing agri prices (rural wallets) and the Sixth Pay Commission benefits (urban wages) would more than offset the oil-hole in wallets.”

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