No respite sooner for FMCG companies

livemint.com:

Dabur India Ltd as it saw comparatively better rural demand. Still, this does not imply that a rural recovery is on the cards as Dabur’s rural growth comes on the back of distribution expansion. In general, the benign commodity cost environment meant increasing competition from local players in some categories.

This means muted volume performance coupled with price cuts impacted revenue. The aggregate Q3 revenue growth of FMCG companies under Nomura’s coverage stood at 2.7%, the lowest in nine quarters at least. The path ahead hinges entirely on volume performance as the room for price hikes appears narrow.

Hindustan Unilever Ltd (HUL) expects price growth to be slightly negative if the costs of commodities remain where they are. Besides, competition would have a bearing on the market share of the listed FMCG companies. From Antique Stock Broking’s latest on-ground interactions, the broking firm notes that the competitive intensity is high in biscuits, foods, detergents and soaps thus resulting in higher price cuts and promotional activities.

This means stress for HUL and Britannia Industries Ltd. In fact, HUL expects the quantum of businesses winning market shares to drop in the coming quarters from the levels of 60% seen in December. On the bright side, FMCG companies continued to see margin expansion despite product price cuts.

But with companies stepping up their advertising and promotional expenses to tackle competition, the extent of rise at the gross margin level was not fully reflected at the operating profit level. While margin expansion should continue ahead, the pace of increase may slow down due to the high base. Thus, a significant uptick in margin hereon would be category or company specific.