Weak demand slows down FMCG revival

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Fast-moving consumer goods (FMCG) companies will continue to see moderation in growth in the coming several quarters on the back of weak consumer demand, say company officials and analysts.

FMCG players such as Hindustan Unilever (HUL), Marico and Godrej Consumer Products (GCPL) have all reported lower-than-expected volume growth for the past few quarters.

P Ganesh, executive vice-president for finance and commercial and company secretary of GCPL, told Financial Chronicle that the company continued to anticipate slowdown in volume growth. “The situation is likely to improve in the next couple of quarters,” he added. GCPL has seen 6 per cent value and volume growth in the domestic soaps business for the third quarter of FY14 and 4 per cent growth in the soaps category for the second quarter.

According to Motilal Oswal research, Hindustan Unilever (HUL)’s volume growth has remained subdued for the past five-six quarters.

For the full financial year 2014, Motilal Oswal expects 7.8 per cent volume growth.

According to Gautam Duggad, vice-president (research) at Motilal Oswal Financial Services, growth for the consumer sector moderated during the December quarter (third quarter of FY14) both in terms of value and volume, driven by deteriorating demand. “The Hindustan Unilever (HUL) management indicated that fourth quarter of FY14 could be weaker than the third quarter. The moderation is across categories and geographies, with discretionary categories facing disproportionate impact,” Duggad said.

HUL posted 4 per cent volume growth for the quarter ended December 2013, lower than 5 per cent growth in the preceding quarter.

“The beneficial effect of a good monsoon has not been felt, reflecting the non-relevance of monsoon swings. While HUL has not seen any downtrading, it is witnessing slowdown in the pace of premiumisation,” added Duggad.

The fourth quarter will face tough comparisons due to a 100 basis points positive impact of pipeline filling ahead of the transporters' strike in the base quarter, Duggad added. While pricing has improved in soaps due to raw material inflation, in beverages, pricing will fade further due to anniversary effect, he said.

Weak macroeconomic environment such as low GDP growth, high inflation and weak consumer sentiment are also taking a toll on broader consumer spends, as disposable incomes have remained flattish.

Ullas Kamath, joint managing director of Jyothy Laboratories, told Financial Chronicle that the offtake in discretionary items continues to be low. “In urban India, the moderation in volume growth will continue. With a new government coming in, the situation is likely to improve. Though we are ahead of the industry, we are seeing low volume growth of around 12 per cent for the past five quarters. We expect 13-14 per cent Ebitda margin growth and 20-25 per cent top line growth during the next financial year,” said Kamath.

Pravin Kulkarni, general manager (marketing) at Parle Products, said volume growth is a function of government policy. “We are seeing single-digit volume growth for a few months now. We expect the situation to change in the next six to eight months,” he added.

As raw material prices are soaring, some FMCG firms are revisiting their sourcing programmes to identify cheaper raw materials to increase efficiency and reduce cost of operations. Firms have also started looking at innovative and more affordable ways of packaging.

FMCG firms are trying to reduce their stock keeping units and working on reducing logistic costs, as they try to control inventory levels to ensure better supply-chain management.

Amnish Aggarwal, senior vice-president (research)at Prabhudas Lilladher, says volume growth for most FMCG companies has slowed down due to weak consumer demand. “In case of Marico, the recovery in volume growth looks difficult, given a weak demand scenario. The company continues to reel under the twin impact of soaring prices of copra on one hand, and poor consumer demand, on the other. The company is likely to take another round of price increase in Parachute, which will delay demand recovery,” said Aggarwal. Marico reported 9 per cent volume growth in the third quarter against 4 per cent for the second quarter.

Raw materials such as copra and palm fatty acids have seen high inflation in prices and have risen by 76 per cent and 51 per cent (year-on-year), respectively. Crude-linked inputs such as high-density polyethylene (HDPE, a packaging material) costs are up by 22.7 per cent (YoY) and 5.4 per cent (QoQ). Key ingredients in detergents such as soda ash prices are up 5 per cent (YoY) and 9 per cent (QoQ) and LAB prices are up by 12 per cent (YoY).

“Sales volume or margin is not expected to improve in the near term as demand has not improved and raw material prices continue to peak,” said Duggad of Motilal Oswal Financial Services.

Ritwik Rai, analyst at Kotak Securities, said volume growth could improve only with an improvement in consumer confidence after the election. “Going forward, urban demand could improve.” he added.

Traditionally, FMCG is considered to be a defensive sector. These stocks have been slow performers in the so-called hope rally in the last one month on the back of election promises.

This article taken from FC my digital fc: http://www.mydigitalfc.com/news/weak-demand-slows-down-fmcg-revival-952
 

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