Muted sales growth for FMCG firms

Results declared by fast-moving consumer goods (FMCG) firms for the September quarter show muted revenue growth despite price-offs and sales promotions. Data compiled by BS Research shows aggregate sales growth of 14 FMCG companies that declared their second-quarter results in the past fortnight declined by 2.39 per cent. Their aggregate profit growth declined 2.36 per cent.

Slower profit growth was due to declines reported by Hindustan Unilever (HUL), Nestle, Emami, Tata Coffee, Titan and Agro Tech Foods, part of US food major ConAgra. While Nestle grappled with the Maggi ban, Emami's profit was lower on investments made in Kesh King, a recent acquisition. Others had a few business issues. Analysts said said a sharp increase in the tax rate, up 1.94 percentage points to 31.6 per cent, coupled with lower other income as well as exceptional expenditure of Rs 12 crore, versus an exceptional gain of Rs 48.7 crore last year, led to a 2.6 per cent decline in net profit for HUL.

HUL's bottom line was also not supported by strong revenue growth, which came in at 4.7 per cent for the September quarter. "Profit declined 2.6 per cent to Rs 962.2 crore on slower growth in revenue and operational performance. While the seven per cent volume growth was healthy, it was buoyed by inventory up-stocking ahead of a transporter strike," said Gautam Duggad, vice-president, research, Motilal Oswal Securities.

For the past few quarters, FMCGs have seen gross margins expand on the back of lower input costs. This is mainly on account of the fall in crude oil prices in the past year. For the September quarter, crude oil was down nearly 50 per cent, year on year, resulting in a cascading impact on inputs by FMCG companies.

Gross margins, as a result, improved by almost three-five percentage points for most in the three months ended September 2015 over the year-ago period, giving them room to channel some of these gains into sales promotion expenditure.

Most firms saw at least a two percentage point expansion in operating margins over the year-ago period. While this aided net profit growth for some companies like Asian Paints, Dabur and Godrej Consumer, higher tax outgo and exceptional items hit the bottom line of others.

Some companies are of the view that the second half will be better than the first. "We remain optimistic that the third and fourth quarters will be better," said Vivek Gambhir, managing director, Godrej Consumer. Dabur's Chief Executive Sunil Duggal said he saw an imminent urban recovery.