FMCG sector: Bucking the trend, but for how long?

Rohit Joshi and Nimish Varma/ZRG

Amidst the gloomy scenario of the Indian economy, most of the FMCG companies have bucked the trend by posting stellar top line growth driven by sustained volumes.

Companies like Marico, Emami, Dabur and Hindustan Unilever (HUL) have recorded 17, 15, 12 and 10 per cent volume growth respectively during the fourth quarter over the corresponding period last year.

The volume growth has surpassed the street estimates for these counters in view of widespread fears that the consumption story might have got adversely impacted due to the ongoing macro-economic uncertainty facing the nation.

Despite the slowdown in the economy and the price hike undertaken due to input cost inflation, the volume growth of these companies have not been affected.

Corroborating the trend, S Raghunathan, CFO, Dabur, said, “FMCG sector has been reporting robust growth and the company (Dabur) has not seen any sign of a slowdown in demand off take. In fact, demand for FMCG products in both urban and rural India has shown a marked increase sequentially.”

Marico too endorsed the bullish trend though cautioning against a short term mild hit. A company statement to the bourses recently said, “Going forward the company is bullish and our belief stands bolstered by the recent strong volume growth witnessed across categories despite price hikes.”

With sustained pressure on gross margins last fiscal, the scenario may worsen with the rupee depreciation leading to higher raw material costs. Dabur’s Raghunathan said while inflationary pressures persisted and hardening raw material prices continued to put pressure on margins, the situation would become more favourable from the second half of the current fiscal.

Dabur, however, indicated that to keep margins under less pressure there might be a price hike soon. “In order to mitigate the impact of rising raw material prices the company expects to hike prices in the second quarter of this fiscal,” Raghunathan disclosed.

Indicating the nature of sales growth in the current fiscal, Sonam Udasi, Head of Research, IDBI Capital, said, “Going by the estimates, the overall top line growth would be around 12 to 14 per cent with a blend of volume and price growth. However, the price hikes are expected to be lower than last year keeping volume growth in consideration.”

The Bombay Stock Exchange (BSE) FMCG index too has outperformed the Sensex by 8 per cent so far this calendar. The FMCG index is a sectoral index at the BSE comprising top 11 FMCG companies.

Considering stock specific returns, Godrej Consumer Products has been the biggest gainer on the BSE FMCG index posting around 47 per cent returns this year. It is closely followed by United Spirits which rewarded the shareholders with 41 per cent returns. ITC, holding the largest weightage on the FMCG index (54.66%), witnessed 15 per cent returns.

Sonam at IDBI Capital argued, “Despite trading at expensive valuations the FMCG pack is still a safe haven for investors to park their money.”

On the performance estimates of the category this fiscal, FMCG analyst Sameer Barde said, “As far as the current quarter is concerned the volume growth will indeed sustain. However, rupee depreciation can pose a threat to the margins. Post this quarter the Monsoon will play a crucial role in deciding revenue growth from the rural markets. On the whole FMCG sector is poised to post a healthy volume growth in the future with profitability being more sensitive to inflation.”