After investors, FMCG companies may have some cheer for consumers

ET Intelligence Group: While investors of FMCG stocks have been a happy lot in the past couple of years, it may now be time for FMCG consumers to rejoice. Peaking margins are likely to prompt many companies to cut product prices to boost sales.
Sluggish volume growth has been a grave concern for the FMCG industry in the past couple of years. High inflation, low consumer confidence and contraction in disposable income hurt consumption. Sustained price increases by companies have not helped either.

Despite the weak macro-economic scenario, companies passed on the cost inflation to consumers. While this dampened consumer demand, it helped improve profitability.
Consequently, most FMCG companies’ margins today are at multi-year highs, offering them enough room to cut prices and lure back consumers. An analysis of the financials of FMCG companies shows that players like HUL, ITC, Marico, Nestle, Emami, Colgate Palmolive and Britannia have been earning margins much higher than their historical average of the past 10 years.
For the nine months ended December, the industry bellwether HUL’s operating margin was 17.2% against its 10-year average of 13.2%. Similarly, ITC’s margins, thanks to its cigarette business, were at 38% for the three previous quarters against the 10-year average of 33.8%.

For some companies like Godrej Consumer Products, GlaxoSmithKline Consumer Healthcare, Jubilant Foodworks and Jyothy Labs, the current margins are not higher than the historical level due to factors ranging from aggressive spend on advertisement to fend off competition to higher expenses or underperformance of an acquired business. Even as companies await external factors to improve for consumption to improve, they do have an internal lever to induce demand. With overall raw material prices being benign due to the lower crude oil prices, there is a case for increased profits to be shared with the consumer.

In the December quarter, while HUL initiated price cuts, companies like Marico and Britannia attracted customers through promotional offers. After sustained price increases for several quarters, Asian Paints did not raise prices in the December quarter. However, the subdued volume growth during the quarter is likely to prompt it to pass on the savings on input cost to consumers in the current quarter.

Many other companies may follow suit and provide discounts or freebies. Investors can, therefore, expect some rationalisation in margins and increase in volumes in the quarters ahead.