FMCG Sector In Q3FY13 – A Preview

Fast Moving Consumer Goods (FMCG) stocks have always been a favourite with investors. This is because they are defensive bets and are backed by consumption-led growth. Even in CY2012, the BSE FMCG Index clearly outperformed the broader indices, appreciating by a whopping 47% while the Sensex yielded returns of around 21%. We have been bullish on the sector in the past, and our recommendations like Godrej Consumer Products, Marico, Dabur India and Bajaj Corp are among the stocks which have given handsome returns to investors. This was despite the fact that companies in the space have borne higher input costs throughout the year, which has impacted their operating margins.

We, at DSIJ, remain positive over the sector, as we believe that it would continue to outperform the markets. Companies in India Inc. would be posting their Dec 2012 quarter financial numbers soon. In this light, we present here, a brief preview of the performance of players in the FMCG sector.

The topline and bottomline growth of companies in the Dec 2012 quarter is expected to be in the range of 15%-18% on a YoY basis. Further, the topline growth would be volume and price-driven. Companies like Godrej Consumer Durables may see a growth of around 30%, benefiting from past expansions through the inorganic route. Bajaj Corp might also see topline growth of over 20%, which would be way above the industry’s growth rate.

Input costs have been the reason for major headwinds face by companies in the sector at the start of the year, but the raw material prices have softened over the year. However, the rupee depreciation played spoilsport, taking off some of these benefits. For instance, the prices of palm oil have decreased approximately by 25% in dollar terms from Nov 2011 to Nov 2012, though the decrease in rupee terms has been around 18%. As palm oil is a key input for Hindustan Unilever and Godrej Consumer Products, the softening in its prices would trigger an improvement in these companies’ margins in the Dec 2012 quarter. The prices of copra (a key input for Marico, comprising 40% of raw material cost) also went down by approximately 26% from Nov 2011 to Nov 2012.

Advertising expenses for the quarter would also remain higher as the Dec quarter was full of festivals. Companies would have spent more on advertisements, as brand recall and higher disposable incomes boost toplines during festive season. For example, Dabur India’s management had indicated in its Sept 2012 quarter analyst conference call that they would be increasimg spends on the advertisement front in the Dec 2012 quarter.

Thus, with the raw material expenses decreasing and other advertisement expenses seeing a rise, the margins for the quarter are likely to remain almost flat. While companies like GCPL, HUL and Marico might see an improvement in their margins, those of Dabur India would remain almost stable.

We believe that companies in the sector would post decent numbers for the Dec 2012 quarter and would continue to remain among the favourites. Marico, Dabur India and Bajaj Corp are among the stocks on which we maintain a bullish stance. With the government fast-tracking the reforms process, companies in the sectors are waiting for a nod to the Goods and Services Tax (GST) in the March 2013 quarter. The implementation of GST would bring down distribution costs for companies in the range of 2%-7% of the turnover, helping them to post good profits.

So far, only two companies have announced their results dates on the BSE website. Bajaj Corp is slated to declare its quarterly numbers on Jan 11, 2013 and Dabur India on Jan 29, 2013. We will keep you posted about the results, so watch this space.

The table shows the topline and bottomline growth on a YoY basis for various companies in the Sept 2012 quarter.