Q4FY13 Results Preview: FMCG Sector

The FMCG sector is considered by investors to be a safe haven in turbulent times. The main reason for this is that the sector remains insulated from economic slowdown witnessed by the economy in general.

In spite of this, the FMCG sector has definitely started witnessing some sort of a slowdown. This fact is substantiated when we see that companies in the FMCG sector have stepped up their advertising and sales promotion activities. We have also witnessed price cuts which are targeted towards boosting demand. In the recently concluded quarter, we have also seen a range of promotional activities being carried out to lure consumers.

Raw material prices are the most important factor while considering companies in the FMCG sector. In the quarter gone by, we have seen mixed trends on this front. The prices of raw materials such as sugar, cocoa and soyabean oil fell by 5.9%, 10.1% and 10.8% respectively on a sequential basis. However, sugar and soyabean prices remained higher when considered on a YoY basis. On the other hand, the prices of palm oil rose by 6.1% on a sequential basis but were lower by 27.5% on a YoY basis. The prices of copra, which is used in the production of coconut oil, were higher by 10.3% on a sequential basis but remained flat YoY.

If we look at the performance of the BSE FMCG index in Q4FY13, we find that it has remained flat while the BSE Sensex had declined by 3.80% in the same period. We feel that the companies will witness some pressure as far as their margins are concerned going forward, but the long term story for the sector remains intact. The main driver will be how these companies penetrate deeper into the rural and urban areas of the country. We feel that with higher penetration, better performance from the sector as a whole would be seen.