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FMCG earnings review

FMCG earnings review  

·         Discretionary spends continue to taper off: The Q4FY2013 results clearly showed a losing volume growth momentum in some of the key discretionary spend-driven premium consumer product categories. Hindustan Unilever Ltd (HUL)’s personal products segment posted a revenue growth of 12%, which is lower than the 17-18% range witnessed in the past few quarters. Marico’s Parachute and Saffola brands continued to post a mid-single-digit volume growth. Another example was the low-single-digit volume growth in the case of Asian Paints as against the healthy high-single-digit growth witnessed in the earlier quarters.

·         But volume growth in certain low-penetrated segments remains robust: The low-penetrated segments helped most of the fast moving consumer goods (FMCG) companies to achieve a strong double-digit revenue growth in the domestic business. Godrej Consumer Products Ltd (GCPL)’s domestic household insecticide and hair colour segments registered a strong growth of above 20% each (largely volume led) while Emami’s domestic business registered a growth of ~17% (13% volume growth) on account of a strong performance by some of the low-penetrated segments (including cooling oil and balms). The value added hair oil segment continued to perform well for companies like Marico and Bajaj Corp, with both achieving a strong growth in the segment due to improving penetration and distribution enhancement. Zydus Wellness’ Sugarfree (sweetener) and Everyuth brands grew close to 50% year on year (YoY) due to the higher advertisement spends and promotional activities.

·         HUL and ITC beat Street’s expectation; Bajaj Corp continued robust performance: The fourth quarter of FY2013 was one of the strong quarters for the large-cap companies like HUL and ITC, which posted a stable OPM and a growth in the high-teens at the bottom line level. Some of the niche players like Zydus Wellness and Bajaj Corp posted a strong operating performance with the profit after tax (PAT) growing by 44.4% and 59.1% respectively (aided by a strong revenue growth and a significant improvement in the GPM). GCPL and GSK Consumer posted a mixed performance with a double-digit revenue growth, but the OPM declined due to the higher advertisement spends during the quarter. It was a quarter of dismal performance for Marico with the core brands clocking a mid-single volume growth and the international business remaining almost flat on a Y-o-Y basis, resulting in a moderation in the revenue growth.

·         Outlook; moderating inflation and higher advertisement spend to support growth in FMCG companies: The tough macro environment is visible in the losing growth momentum in the form of lower volume growth in many FMCG companies. This situation could improve if the inflationary pressures moderate further, especially the consumer price index (CPI). Moreover, softening in some of the key commodity prices would help the FMCG companies to focus on improving the volume growth by supporting its brands with higher advertisement and promotional spends. We believe the new product launches, an increase in the domestic distribution reach, improving business prospects of the international business and inorganic initiatives in the domestic and international markets would support growth in the FMCG sector. We maintain our stance of remaining selective in the sector, as some of the companies are trading at their premium valuations. We continue to like ITC from the long-term perspective in the large-cap space while Bajaj Corp and Jyothy Laboratories remain our top picks in the small- to mid-cap FMCG space.