FMCGs like HUL, Dabur, Godrej, Marico on consumption-driven growth

22 May,2012

By A Correspondent


India’s fast-moving consumer goods, or the FMCG sector, has been able to weather the impact of an economic slowdown and rising input costs yet another quarter, as firms led by HUL beat street expectations both on top line and bottom line growth.


A study of the aggregate financial performance of the leading 10 FMCG companies over the past eight quarters shows that the industry has grown at an average 16-21 per cent in the past two years with average operating margins being 22 per cent.


Very few other industries can boast of having such a performance track record. “The consumer sector typically is the last and the least to suffer during a slowdown,” said Manoj Menon, senior analyst at Kotak Institutional Equities.


Most companies are reaping the benefits of the direct distribution expansion mostly in rural India. HUL, for instance, has tripled its rural penetration in the last couple of years. Sales from modern trade have also been a strong growth driver for companies. Marico has posted a growth of over 45 per cent in revenues from its rural and modern trade businesses during FY12.


The quarter to March performance of FMCG companies like HUL, Dabur, Godrej Consumer Products, Marico, Asian Paints, GSK Consumer Healthcare, Procter & Gamble Hygiene and Healthcare and Jubilant Foodworks is also a reflection of consumption-driven growth.


Half of HUL’s 20 per cent revenue growth during the March quarter was volume driven. Dabur’s domestic sales rose 19.2 per cent with volumes rising 9.5 per cent. Godrej Consumer Products logged 30 per cent sales in soaps in India – 17 per cent of which was volume-driven. Asian Paints registered 29 per cent growth in its revenues from domestic business, of which 15 per cent was volume growth.


The company had raised prices by close to 12 per cent on its portfolio during the quarter. Jubilant Foodworks, owner of the Dominos Pizza franchise in India, reported 26 per cent same store growth, which was almost entirely volume-driven despite the company raising its menu prices by 10 per cent. Marico has been able to achieve a 17 per cent volume growth for the March quarter from a total revenue growth of 23 per cent for the quarter.


GSK Consumer Healthcare registered 14.5 per cent increase in net sales – 7 per cent of which was driven by volume growth and the rest through higher realisations on account of price increases. Nestle was probably the only company to have a largely value-driven revenue growth of 13 per cent during the March quarter.


Exceptional value growth always carries the risk of hurting volumes. Till now, most FMCG companies have been able to perform well while balancing between volume and value growth. “Over the long run, we see consumer demand being resilient,” Nitin Paranjpe, chief executive officer of HUL, had said at the press conference following the company’s results. According to Mr Paranjpe, the secular trend of consumers is towards uptrading rather than downtrading.


“The demand for consumer goods is relatively inelastic compared to that of other products,” explained Milind Sarwate, group chief financial officer, Marico. An earlier ETIG analysis of the growth in revenues and profits of leading FMCG companies revealed that companies registered a much faster growth in revenues and profits during periods of high inflation (in 1994-98 and again from 2006 till date) compared with periods of low inflation (1999-2005).


“During an inflationary period, there is a likely market share gain for organised players from the unorganised regional players,” Mr Menon explained. Larger firms enjoy economies of scale on account of bulk buying and higher pricing power on their reputed brands.


The ET FMCG Index has a price to earnings multiple of 36 against the Sensex P/E of 16.1. Stocks of Godrej Consumer Products and Asian Paints hit a new high ahead of the companies’ result announcements. Stocks of HUL, Marico, Dabur, Glaxosmithkline Consumer Healthcare and Jubilant Foodworks are hovering near record high levels.


However, their current valuations are still lower than their all-time record levels. In case the broader economy is sluggish, analysts fear that the going may not be good for the sector in the coming quarters. “Moderation is very much on the anvil,” cautioned Mr Menon. For now, FMCG companies continue to live up to their reputation of being a defensive investment play.


Source: The Economic Times

Copyright © 2012, Bennett, Coleman & Co. Ltd. All Rights Reserved


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