ET survey shows net profit of consumer product companies to rise 16-19%

MUMBAI | NEW DELHI: Consumer product companies are likely to experience a decent July-September quarter driven primarily by higher sales of mass-priced products and new launches, which is in sharp contrast to the usual trend of buyers checking their spends on nonessentials.


An ET survey of 10 brokerage firms — Emkay Global, Morgan Stanley, Brics Securities, Sharekhan, Angel Broking, Religare, IDFC, Macquarie, KR Choksey and Edelweiss Securities — indicates net profit to rise 16-19% from the year-ago period on the back of a 13-16% increase in sales.

“Demand has been stable and we are positive that consumption will remain consistent going forward in the festive quarter,” said Sunil Duggal, CEO of Dabur, which makes Vatika shampoo and Real juices. “There could be margin contraction because of inflation and we remain cautious.”

While high inflation and lower disposable incomes may force customers to opt for less expensive products, companies have tried to beat slowdown by focusing on regional brands, launching smaller packs, offering price discounts, higher grammage for the same price, and more such innovative schemes.

Yet, the second quarter ending September could see improvement in operating margins as prices of key raw materials were on the decline. “The operating margin for FMCG universe is likely to increase by 50 bps year-on-year (YoY), muted compared to the previous quarter (up 150 bps YoY), given that the intensity of price hikes has reduced on account of stable input prices and lower advertising and promotion spends,” said Varun Lohchab, analyst at Religare Securities, in its earnings preview report.

The prices of palm oil, copra and linear alkyl benzene (LAB) have declined by 10.4%, 31.4% and 1.4% YoY, respectively during the quarter. Despite rupee depreciation and higher advertising & promotion spends negating most of the gains achieved by drop in input costs, P Ganesh, chief financial officer, Godrej Consumer Products, said margin improvement could be seen next quarter. “Raw material prices have come down in the last few months and it generally has a lag effect on our profitability,” he said.Further, revival of monsoon in August has also helped FMCG sector as fears of drought have receded.

“Earlier in the year, there were fears about a weak monsoon impacting rural growth. But as monsoon picked up, consumption patterns have been improving,” NH Bhansali, CEO, finance of Kolkata-based Emami, said. Several companies entered newer categories to keep the volumes chart ticking. Marico test marketed muesli, Godrej introduced Aer air fresheners and Hindustan Unilever introduced TRESemme hair care range. Analysts also expect there could be more product launches and relaunches, especially after the new packaging norms are implemented from November.

However, most companies, including Dabur and Emami, don't anticipate major price rises as commodity costs stabilise and demand could suffer in a price-sensitive market.

“Overall slowdown has begun to have an impact on consumer spending, particularly with respect to discretionary spending. This, coupled with high inflation, has left companies with little room to implement further price hikes,” said an Angel Broking report.