FMCG companies found the going good in the June'06 quarter. This is the fifth consecutive quarter in which industry sales growth has been above 10%. Operating profit margins, however, are showing signs of being under pressure.
Companies have been hiking product prices to offset higher input costs, while tax benefits accruing to companies with units in tax-exempt locations continue to provide a buffer. Aggregate results of 12 FMCG companies with sales of Rs 9,231 crore, show sales rose 16% in the June '06 quarter, while profit increased by 16.6% to Rs 1,415 crore.
The fact that tax benefits are helping profit growth is evident from PBT growing by only 13.6% during the quarter. Going forward, as far as sales growth is concerned, high growth in the second half of FY06 makes it a tough task to replicate growth in the second half of the current fiscal.
Thus, there may be some slowdown in growth in the second half though full year growth will still be robust. ITC and HLL, the two largest companies, did well, with HLL's sales growing more sedately during the quarter with a 8.7% growth in sales. ITC, in contrast, reported sales growth of 26% and profit growth of 16.8%.
HLL's profit growth was higher at 35.1% (25% at the PBT level). HLL benefited from good growth in its home and personal care businesses, while sales of beverages declined during the quarter. ITC benefited from good growth in its cigarettes business, and also from its other divisions of FMCG, agri-business, paper, and hotels.
Among the mid-sized companies, Colgate-Palmolive (India), Marico Industries, Britannia Industries did quite well, with high sales growth. Godrej Consumer Products did well too, with brand sales up by 19% but headline numbers were lower due to the contract manufacturing business not yielding revenues.
On a consolidated basis, its performance was even better, with sales up 42% and profit up by 21%, aided in part by acquisitions. The trends in expenditure show a steady increase in raw material cost to sales, which has been a constant worry for FMCG companies.
Key petro-based intermediates used in personal and home-care products have become expensive, due to rising crude prices. FMCG companies have also been utilising the savings in excise and income tax on higher advertising. In the June '06 quarter, advertising and marketing expenses grew 20.7% to Rs 568 crore.
Advertising as a percentage to sales, however, has remained relatively steady at about 6% of sales compared to about 4.5-5% in previous years. As the base effect of the tax savings wears off, advertising expenditure growth will return to normal levels, though in absolute terms it will still grow.
As far as profits are concerned, most companies have done quite well. Britannia suffered a decline of 22.5% in net profit due to rising expenditure. Nirma and Nestle's net profit too declined during the quarter mainly due to a sharp rise in raw material expenses. Marico, Dabur and Hindustan Lever ended the quarter with very good growth rates, above 30% in net profit.