FMCG sector's growth may have slowed

Average operating margins are also likely to be down in the same period, as compared to the five-quarter period preceding it. Analysts say it could come down by as much as 10 percentage points, touching 17 per cent, from the 27 per cent earlier.

This would indicate the beginning of a slowdown after five quarters of robust top line and bottom line growth, say the analysts. They blame rising food inflation as the key reason for the lower consumer offtake.

"When the price of essential food commodities go up, consumers have a tendency to adjust their allied household expenditure accordingly," explains Jaibir Singh Sethi, analyst, consumer & retail, Noble Group, adding: "This impacts offtake of consumer products."

A recent Morgan Stanley report quoting AC Nielsen data highlighted the point. It reveals that FMCG sales grew by seven per cent in the October-November 2009 period, as compared to a 14.8 per cent growth in the first six months (April to September) of the current financial year.

It adds that the top 10 players saw a deceleration in sales growth. "Sales in the Oct-Nov period grew by 3.3 per cent vis-a-vis growth of 9.9 per cent in the first half of the current financial year," the report stated.

The report added that the most pronounced slowdown in sales was in the laundry and soaps category between October and November. While tea, talcum powder, milk powder, hair oils and noodles saw a drop in sales to the extent of 9-11 per cent during the period.

"The deceleration in biscuits, chocolates, toothpastes, shampoos, skincare products and coffee was a little less pronounced," it adds.

ON THE DOWNSLIDE?
Company	Sales			Net profit
	Q3  (Rs cr)	QoQ  (%)	YoY (%)	Q3  (Rs cr)	QoQ  (%)	YoY (%)
HUL	4729.00	10.80	8.00	675.00	35.20	10.70
ITC	4475.00	3.00	16.00	1101.00	9.10	21.90
Asian Paints	1439.00	-16.50	9.00	146.00	-28.90	145.20
Tata Tea	1437.00	2.50	10.00	102.00	7.50	24.20
Nestle	1313.00	0.80	20.50	173.00	-3.00	25.40
Dabur	950.00	12.00	22.00	137.00	-1.00	27.10
Britannia	891.00	3.90	9.00	46.00	-30.40	-12.50
Marico	710.00	2.60	14.00	61.00	-2.10	20.00
Godrej Consumer	527.00	-8.30	54.20	79.00	-14.10	99.40
GSK Consumer	414.00	-16.30	24.40	44.00	-26.60	35.20
(Source: Motilal Oswal)

What caused this steep drop in operating margins in the October-December quarter? There are two key factors: higher input costs and higher ad spending, say analysts.

Almost all agri-commodities have gone up by 50-100 per cent in the past one year. Crude oil has also shot up by almost 50 per cent in the same period.

But, the full impact of rising input costs has been felt only after the weak monsoon this year, that is after September. "So, though inflation was a bit of a worry three-four months ago, it's a serious concern now," says an analyst based in New Delhi. "Managements are looking at ways and means to deal with food price inflation."

One obvious way to tackle runaway input costs is to hike prices of products. But company honchos as well as analysts maintain that this is not likely to happen soon. Says Hoshedar K. Press, vice-chairman, Godrej Consumer Products Ltd, "I don't see a price hike till the first quarter of next year."

A point reiterated by Harsh Mariwala, chairman & managing director, Marico Ltd. "At least for the next few months, prices will not go up," he says. Marico brought down prices of entry-level packs of products such as Saffola and Nihar by 10 per cent in the first half of the current financial year. They have not been revised upwards following inflationary pressures in the third quarter.

Most companies have maintained this stance in the third quarter. On an average, the price cut across key categories such as soaps, detergents, toothpastes, etc was about 10-15 per cent, say analysts.

"So, the impact on value growth in the third quarter is bound to be there," says an analyst with a bokerage agency in Mumbai. Company honchos privately admit they are bracing themselves for a slight value-growth erosion in the third quarter.

On ad-spend, analysts estimate the increase in expenditure in the third quarter should be at least 15-20 per cent more than what it was in the same period last year.

"Don't forget general consumer sentiment was weak last year. This year, there has been a revival. Companies were, therefore, fighting hard to retain market share. They were launching products at the same time, not to mention that the October-December period is the festive period. So, decibel levels were high," says Sethi of the Noble Group.